THE  GIFT  OF 

MAY  TREAT  MORRISON 

IN  MEMORY  OF 

ALEXANDER  F  MORRISON 


ELEMENTS   OF   POLITICAL   ECONOMY 


-^^ 


ELEMENTS 


OF 


POLITICAL  ECONOMY 


BY 


J.   SHIELD  NICHOLSON,   M.A.,  D.Sc. 

M 
PROFESSOR   OF  POLITICAL  ECONOMY   IN   THE   UNIVEE8ITT   OF  EDINBFRGH;    SOMETIME 
EXAMINER   IN   THE   UNIVERSITIES   OF   CAMBRIDGE,    LONDON,    AUX)   VICTORIA 


THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  Ltd. 
1903 

All  rigfita  reserved 


COPTKIGIIT,    1903, 

By  the  MACMILLAN  COMPANY. 


Set  up,  electrotyped,  and  published  November,  1903. 


NorluooU  iPrtsa 

J.  S.  Cushin-  &  Co.  -  Berwick  Sc  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


r>- 


PREFACE 

This  work  is  intended  primarily  for  the  use  of  students. 
The  leading  principles  are  stated,  as  far  as  possible,  with- 
out the  introduction  of  controversial  matter.  At  the 
same  time,  throughout  the  work  indications  are  given  of 
the  points  still  in  dispute  and  of  the  difficulties  involved 
in  the  further  development  of  the  principles  and  theories 
of  which  an  elementary  exposition  is  given.  The  work  is 
based  on  the  "Principles  of  Political  Economy"  (3  vols.) 

w  by  the  same  author.  It  is,  however,  not  simply  an  ab- 
stract. In  the  first  four  books  the  material  used  has 
been  almost  entirely  recast.  In  the  last  book  it  was 
thought  better  to  omit  certain  topics  altogether  rather 
than  attempt  any  further  condensation  of  the  argument. 
In  order  to  keep  the  volume  within  reasonable  limits 
the  greater  part  of  the  historical  matter  which  forms  a 
characteristic  feature  of   the  larger  work  has   been  ex- 

cj  eluded,  though  the  results  of  the  application  of  the  his- 
torical method  have  been  retained.  Little  space  also  was 
available  for  the  history  of  economic  thought  and  doc- 
trines. In  the  text,  however,  the  importance  of  these 
"and  other  omitted  topics  has  been  emphasised,  and  the 
student  is  recommended  throughout  to  supplement  his 
reading  by  reference  to  special  works.  At  the  end  of 
each   chapter  references   are  given  to  books  which   the 

V 

434418 


VI  PREFACE 

author  has  found  useful  and  suggestive,  and  it  is  hoped 
that  the  selection  as  far  as  it  goes  is  representative  and 
impartial. 

I  am  more  than  usually  indebted  to  Mr.  A.  B.  Clark, 
M.A.,  my  assistant  in  the  University,  not  only  for  his 
supervision  and  correction  of  the  proofs,  but  also  for  the 
very  full  index. 

J.   SHIELD  NICHOLSON". 

University  of  Edinburgh, 
October,  1903. 


CONTENTS 


INTRODUCTORY 
SCOPE   AND   METHODS 


1.  The  Magnitude  of  Economic  Literature  . 

2.  Of  the  Relation  of  Political  Economy  to  Other  Sciences 

3.  The  Scope  and  Definition  of  Political  Economy 

4.  Tlie  Uses  of  Definitions  in  Economics 

5.  Rules  for  Definitions 

6.  The  Methods  of  Political  Economy 

7.  The  Laws  of  Political  Economy 

8.  The  Difficulties  of  Economic  Studies 


1 

3 

5 

8 

10 

13 

15 

17 


BOOK   I 
CONSUMPTION   AND  PRODUCTION 


Chapter  I. —  Wealth,   Utility,  and  Consumption 

§  1.     The  Popular  Conception  of  Wealth 21 

2.  The  Economic  Analysis  of  Wealth 21 

3.  Utility  and  Disutility 22 

4.  The  Relativity  of  Utility 23 

6.     Economic  Meaning  of  Consumption 23 

6.  Total  and  ^Marginal  Utility 24 

7.  Transition  from  the  Individual  to  the  Nation  ....  21:! 

8.  The  Measurement  of  Utility  by  Money  —  Consumers'  Surplus  2(5 
Note  on  the  Use  of  Curves  in  Economics —  Utility  Curves     .  29 


Chapter  II.  —  Production  and  the  Agents  of  Production 


§  1.  Meaning  of  Production     . 

2.  The  Agents  of  Material  Production 

3.  Nature      ...... 

4.  Labour 


32 
34 
35 
37 


vu 


Vm  CONTENTS 

PAGE 

5.  Capital 41 

6.  The  Connection  between  Consumption  and  Production  .         .  45 
Note  on  the  Curve  representing  the  Quantity  of  Labour  and 

the  Utility  of  the  Product 45 

Chapter  III.  —  Division  of  Labour 

§  1.     Meaning  of  Division  of  Labour 47 

2.  Advantages  of  Division  of  Labour 48 

3.  Division  of  Labour  is  limited  by  the  Extent  of  the  Market      .  50 

4.  The  Localisation  of  Industry    .......  51 

5.  Disadvantages  of  Division  of  Labour 52 

Chapter  IV. — Production  on  a  Large  and  Small 

Scale 

§  1.     Production  on  a  Large  Scale  in  Manufactures          ...  56 

2.  Other  Cases 57 

3.  Counteracting  Causes 57 

4.  Joint-stock  Companies 69 

Chapter  V.  —  Prodxiction  on  a  Large  and  Small 
Scale  in  Agriculture 

§  1.     Complexity  of  the  Question 62 

2.  Large  and  Small  Farming  compared 64 

3.  Historical  and  Social  Influences 65 

Chapter  VI. —  Tlie  Laws  of  Diminishing  and  Licreas- 
ing  Return 

§  1.     Plan  of  the  Argument 68 

2.  The  Law  of  Diminishing  Return  to  Land        .         .         .         .  68 

3.  Counteracting  Causes 71 

4.  Other  Applications  of  the  Law         ......  73 

5.  The  Law  of  Increasing  Return 74 

Chapter  VII.  —  The  Principle  of  Popidation 

§  1.     The  Theory  of  Mai  thus 78 

2.     The  Three  Propositions  of  Malthus 79 


CONTENTS  •  IX 


Chapter  VIII.  —  The  Groivth  of  Capital 

PAfJK 

§  1.     Meaning  of  the  Growth  of  Capital 83 

2.  The  Limits  to  the  Growth  of  Capital  during  any  Period          .  85 

3.  The  Power  to  save 86 

4.  The  Will  to  save 87 

5.  The  Growth  of  the  Different  Species  of  Capital        ...  89 

6.  The  Limits  to  the  Production  of  Wealth          ....  91 


BOOK  II 

DISTRIBUTION 

Chapter  I.  —  Distribution  and  PropeHy 

§  1.     Meaning  of  Distribution 95 

2.  On  the  Nature  of  the  Laws  of  Distribution      ....      97 

3.  The  Conception  of  Sovereignty  and  its  Application  to  Distri- 

bution   98 

4.  Economic  Definition  of  Private  Property         ....      99 

5.  The  Economic  Bases  of  Private  Property        ....     100 

Chapter  II.  —  Inheritance  and  Bequest 

§  1.  Economic  to  be  distinguished  from  Legal  and  Ethical  Ideas    .  106 

2.  General  View  of  Bequest  and  Inheritance        ....  106 

3.  Inheritance 108 

4.  Bequest 109 

Chapter  III.  —  Property  in  Land  —  Expropriation  — 
Compensation 

§  1.     Property  in  Land 112 

2.  Expropriation 114 

3.  Compensation 116 

Chapter  IV.  —  Socialism, 

§  1.     Historical  Variations  in  the  Institution  of  Property         .        .     120 

2.  Definition  of  Socialism 122 

3.  Classification  of  Socialistic  Schemes 123 


CONTENTS 


4.  State  Socialism  or  Collectivism 

5.  Tlie  Socialist  Critique  of  Individualism 

6.  Difficulties  of  Socialism    . 

7.  The  Benefits  of  Socialist  Ideals 


PASK 

125 
128 
130 
134 


Chapter   V.  —  Quantitative  Distribution 

§  1.     Of  the  Quantitative  Distribution  of  Property  ....  136 

2.  The  Distribution  of  the  Agents  of  Production  as  determined 

by  Law  and  Custom 137 

3.  The  Quantitative  Distribution  of  Incomes        ....  139 

4.  Money  Incomes  and  Real  Incomes  ......  142 


Chapter  VI.  —  Wages  and  the  General  Bate  of 
Wages 


1.  "Wages  as  the  Real  Reward  of  a  Quantity  of  Labour 

2.  Real  as  compared  with  Nominal  Wages 

3.  Wages  as  Payment  for  Work  done 

4.  The  General  Rate  of  Wages 

5.  The  Wages  Fund  Theory 

6.  The  Produce  Theory  of  Wages 

7.  General  Relations  of  Wages  to  Profits  and  Rents 


145 
146 

147 
149 
154 
160 
164 


Chapter  VII.  —  Helative  Wages 


1.  Differences  of  Wages 

2.  Pa7'ticular  Cases        .... 

3.  Wages  of  Individuals 

4.  The  Effects  of  Machinery  on  Wages 

5.  Conclusion 


166 
169 
171 
172 
173 


Chapter  VIII.  —  Profits 


§  \.  Analysis  of  Profits 

2.  Loan-interest  and  Profit-interest 

3.  Insurance  against  Risk     .         .         .        .         , 

4.  Wages  of  Management      .         .         .         .         , 
6.  The  Reward  of  Enterprise  and  Good  Fortune 

6.  The  Tendency  of  Profits  to  Equality 

7.  The  General  Rate  of  Profits     .        .        .        . 


174 
175 

178 
180 
181 
182 
18J 


CONTENTS 


XI 


Chapter  IX.  —  Harmonies  and  Conflicts  of  Labour 
and  Capital 

1.  Relations  of  Labour  and  Capital  in  General 

2.  Conflicts  of  Interest ;  Origin  of  Trade  Unions 

3.  Functions  of  Trade  Unions 

4.  Wages  and  tlie  Consumer 

5.  Wages  and  Profits 

6.  Evils  of  Conflicts  of  Labour  and  Capital 

7.  The  Harmonies  of  Labour  and  Capital    . 


PAGE 

185 
186 
187 
188 
191 
195 
196 


Chapter  X. — Economic  Rent 

§  1.  Different  Meanings  of  the  Term  Rent 

2.  Economic  Rent  from  Extensive  Cultivation     . 

3.  Economic  Rent  from  Situation         .... 

4.  Economic  Rent  from  Intensive  Cultivation 

5.  Economic  Rent  from  Scarcity  .... 

6.  Combination  of  the  Different  Forms  of  Economic  Rent 

7.  Rent  of  Non-agricultural  Land         .... 

8.  Quasi-VQ-ai 


199 

201 
202 
203 
204 
204 
206 
208 


BOOK   III 


EXCHANGE 

Chapter  I.  —  Value  and  Markets 

§  1.     Exchange 211 

2.  Value 211 

3.  Value  in  Exchange 212 

4.  Relative  Prices  must  be  adjusted  to  Relative  Values       .        .  215 

5.  A  General  Rise  of  Values  is  impossible 215 

6.  Other  General  Propositions  on  Value 216 

7.  Markets 217 

Chapter  II.  —  On  Demand  and  Siqiply 

§  1.     The  Law  of  Demand 220 

2.  Changes  in  Demand  —  Rise  and  Fall  in  Demand     .        .        .  222 

3.  The  Law  of  Supply 224 


Xll  CONTENTS 

PAOB 

4.  The  Equation  between  Demand  and  Supply  —  the  Temporary- 

Equilibrium  Price 225 

5.  The  Immediate  Effects  of  Changes  in  Demand  and  Supply    .  227 

6.  Ulterior  Effects  of  Changes  in  Demand  and  Supply         .        ,  228 
Notes  on   Curves  illustrating  Demand  and  Stipply  and  the 

Immediate  Effects  of  Changes  in  Demand  and  Supply  on 

Price 229 

Chapter  III.  —  Normal  Value  and  Cost  of  Production 

§  1.     Meaning  of  Normal  Value 231 

2.  Keal  Cost  and  Money  Cost 232 

3.  The  Analysis  of  Cost  of  Production 234 

4.  Case  of  Joint  Products 239 

Note  on  Expenses  of  Production 240 

Chapter  IV.  —  Bent  and  Value  —  Monopoly  Value 

§  1.     Economic  Rent  as  a  Factor  in  Price        .....  241 

2.  Quasi-\ei\t 243 

3.  Monopoly  Value 245 

4.  Competition  and  Monopoly  Prices  compared  ....  248 

5.  Conditions  requisite  to  a  Seller's  Monopoly     ....  249 

6.  Buyer's  Monopoly 250 

Chapter  V. — Functions  and  Systems  of  Money 

§  1.     What  is  Money  ? 252 

2.  The  Primary  Functions  of  Money 253 

3.  The  Qualities  of  Good  Metallic  Money 258 

4.  Systems  of  Metallic  Money 259 

Chapter  VI.  —  TJie  Quantity  Theory  of  Money 

§  1.     A  Hypothetical  Market 261 

2.  Influences  modifying  that  of  Quantity 263 

3.  Cost  of  Production  of  Gold  in  Relation  to  its  Value         .        .  265 

Chapter  VII.  —  Gresham^s  Law  —  Tokeii  Coins  — 
Inconvertible  Notes 

§  1.     Gresham's  Law 269 

2.  Token  Coins 271 

3.  Inconvertible  Notes 273 

4.  The  Evils  of  Depreciation  of  Notes 276 


CONTENTS  XUl 


Chapter  VTII.  —  Credit  and  General  Prices 

PAGE 

§  1.  Credit  and  the  Quantity  Theory  of  Money       ....  278 

2.  Gold  Reserves  as  a  Limit  to  Credit  Prices        ....  279 

3.  The  Limits  imposed  by  Foreign  Trade 281 

4.  Conclusion  of  the  Quantity  Theory  of  Money  .         .        .  282 


Chapter  IX.  —  Bimetallism 


§  I.  Meaning  of  Bimetallism 

2.  Instability  of  Bimetallism  in  One  Country 

3.  International  Bimetallism 

4.  Difficulties  of  International  Bimetallism  . 

6.  The  Advantages  claimed  for  International  Bimetallism 


284 
284 
285 
288 
290 


Chapter  X.  —  Bayiks  of  Issue 

§  1.     Development  of  Banking 292 

2.  Origin  and  Uses  of  Bank-notes 293 

3.  The  Limitation  of  the  Issues  of  Notes     .....  296 

4.  The  Denomination  of  Notes 298 


Chapter  XI.  —  Banks  of  Deposit  and  Commercial 
Crises 

§  1.     Progress  of  Deposit  Banking 304 

2.  Limits  to  the  Creation  of  Bank  Money     .....  305 

3.  The  Management  of  Banking  Reserves 306 

4.  Commercial  Crises 309 


Chapter  XII.  —  TJie  Rate  of  Interest  and  the  Hate 
of  Discount 

§  1.     Interest  on  Capital  and  Interest  on  Money      ....  311 

2.  Interest  on  Loanable  Capital 312 

3.  Interest  on  Loanable  Money  —  the  Rate  of  Discount       .         .  316 

4.  Causes  of  Difference  in  the  Rates  for  Long  and  Short  Periods  320 

5.  The  Relative  Stability  of  the  Rate  for  Long  Periods        .        .  322 

6.  The  Exchange  Value  of  Money  and  the  Rate  of  Interest         .  324 


XIV  CONTENTS 


Chapter  XIII.  —  The  Theory  of  Foreign  Trade 


PAGE 


1.  The  Problems  of  Foreign  Trade 327 

2.  Meaning  of  Foreign  Trade 328 

3.  Tlie  Pure  Tlieory  of  Foreign  Trade 329 

4.  Tlie  Tlieory  of  Comparative  Cost  in  Terms  of  Barter      .        .  332 

5.  The  Theory  of  International  Values 3;J6 

6.  Money  iu  International  Trade 333 

Chapter  XIV.  —  The  Foreign  Exchanges 


1.  International  Debts 

2.  International  Debts  are  payable  in  Money 

3.  The  Mint  (or  Nominal)  Par  of  Exchange 

4.  Gold  Points 

5.  Favourable  and  Unfavourable  Exchange 

6.  Effects  of  Depreciation  of  the  Currency 

7.  Indirect  Effects  of  a  Depreciation  of  the  Currer 

Foreign  Trade  of  a  Country 

8.  On  the  Distribution  of    Gold    throughout    the   Commercial 

World 354 


.  340 

.  343 

.  345 

.  346 

.  347 

.  350 
cy  on  the 

351 


Chapter  XV.  —  Advantages  and  Disadvantages  of 
Fo7'eign  Trade 

1.  The  Real  Advantages  of  Foreign  Trade 350 

2.  Possible   Disadvantages  of   Foreign   Trade   to  a  Particular 

Country 358 


BOOK   IV 

ECONOMIC  PEOGRESS 

Chapter  I.  —  Tlie  Nature  and  Measurement  of  Eco- 
nomic Progress 

§  1.  Connection  of  Economic  Progress  with  General  Progress        .  367 

2.  The  Nature  of  Econonuc  I'rogross    ......  369 

3.  Progress  and  Utility 372 

4.  Progress  in  Production,  Exchange,  and  Distribution        .         .  374 


CONTENTS  XV 


Chapter  II.  —  Progress  in  Money  and  Prices 

PAGE 

§  1.     Progress  and  Money 378 

2.  Progress  and  General  Prices 380 

3.  Progress  and  Relative  Prices 383 


Chapter  III.  —  Eejit  and  Progress 

1.  Rent  as  a  Measure  of  Progress 387 

2.  Progress  and  Urban  Rents 388 

3.  Progress  and  Agricultural  Rents       ......  389 

4.  The  Effects  of  Improvements  on  Agricultural  Rents       .        .  391 


Chapter  IV.  —  Progress  and  Profits 

§  1.     General  View 395 

2.  Progress  and  Loan-interest 396 

3.  Progress  and  General  Profits 398 

4.  The  Tendency  of  Profits  to  a  Minimum  ,        .        .        .        .  401 


Chapter  V.  —  Progress  and  Wages 

§  1.    Progress  and  the  Price  of  Labour     .,,...     405 
2.     The  Relations  of  Labour  and  Capital 410 


BOOK   V 

THE  ECONOMIC  FUNCTIONS   OF  GOVERNMENT 

Chapter  I. — Economic  Functions  of  Government 

§  1.     The  Principle  of  Natural  Liberty,   Laisser-faire,  or  "  Mini- 
mum Interference "      415 

2.  The  Principle  of  Maximum  Utility 416 

3.  Summary  of  the  Benefits  and  Defects  of  Individualism  .        .  418 

4.  The  Methods  of  Legal  Interference 420 

5.  The  Methods  of  Governmental  Action 423 

6.  General  Limitations  to  Governmental  Interference .        .        .  425 


XVI  CONTENTS 

Chapter  II.  —  Character  and  Definition  of  Taxation 
§  1.     The  General  Characteristics  of  Taxation 429 

Chapter  III.  —  The  Canons  of  Taxation 


PAGE 


1.  Adam  Smith's  Canons  of  Taxation  :  First  Equality 

2.  Equality  of  Sacrifice 

3.  The  Faculty  Theory  of  Tixxation      .... 

4.  Taxation  of  Unearned  Increments   .... 

5.  The  Benefit  or  Social  Dividend  Theory  of  Taxation 

6.  The  Social  Function  of  Taxation      .... 

7.  The  Principle  of  Formal  Justice       .... 

8.  Adam  Smith's  Other  Canons  of  Taxation 

9.  Other  Rules  of  Taxation 


434 
437 
440 
442 
444 
445 
447 
447 
449 


Chapter  IV.  —  Incidence  of  Taxation 


§  1.     Direct  and  Indirect  Taxes 452 

2.  The  Incidence  of  Taxation  as  determined  by  Law  and  Custom  454 

3.  Incidence    of    Taxation    as    determined    by    Contract    and 

Exchange 455 

4.  The  Immediate  Effects  on  Price  of  a  Tax         ....  456 

5.  Ulterior  Effects  of  Taxation  on  Prices 458 

Note  on  Curve  illustrating  the  Immediate  Effects  on  Price  of 

a  Tax 459 

Chapter  V.  —  Taxes  on  Rent  and  Land 

§  1.     Taxes  on  Pure  Economic  Rent :  Agricultural  Land         .        .  461 

2.  Taxes  on  Economic  Rent :  Building  Land        ....  463 

3.  Taxation  of  Land  Values :  Practical  Conclusions    .        .        .  466 

Chapter  VI.  —  Taxes  on  Consumable  Commodities 

§  1.     Methods  of  taxing  Commodities 471 

2.  The  Incidence  of  Taxes  on  Commodities  ....  474 

3.  Rules  for  Taxes  on  Consumable  Commodities  .        ,        .  480 

4.  Direct  and  Indirect  Taxes  compared 481 

Chapter  VII.  —  Free  Trade  and  Protection 

§  1.     Meaning  of  Free  Trade 484 

2.     Free  Trade  and  tlie  Consumer 485 


CONTENTS  XVll 


3.  The  Protection  of  Home  Industries :  General  View          .        .  486 

4.  The  Assumptions  of  the  Geueial  Argument  for  Free  Trade     .  487 

5.  Theoretical  Exceptions  to  Free  Trade 490 

6.  The  Negative  Argument  for  Free  Trade 494 

Chapter  VIII. — Principles  of  Public  Expenditure 

§  1.     Nature  of  Public  Expenditure 497 

2.  Classification  of  Public  Expenditure 499 

3.  Analogies  from  Taxation 501 

4.  The  Principles  of  Expenditure 502 

Chapter  IX.  —  Colonies  and  Dependencies 

§  1.     Early  History  of  British  Colonies  and  Dependencies        .         .  511 

2.  The  Profit  and  Loss  to  the  Mother  Country  of  Colonies  and 

Dependencies 515 

3.  Trade  and  the  Flag 516 

4.  Imperial  Federation 518 


ELEMENTS  OF  POLITICAL  ECONOMY 


INTRODUCTORY 

SCOPE   AND   METFOJDS 

1.  The  Magnitude  of  Economic  Litt^rature.  — fc  TS4.5  there 
was  published  a  book  which  now  has  a  considerable  scarcity 
value  ;  namely,  the  Literatwe  of  Political  Economy^  by  J.  R. 
McCulloch.  This  work  is  described  as  a  classified  cata- 
logue of  select  publications  in  the  different  departments  of 
that  science.  It  begins  with  the  general  treatises  and  the 
fundamental  principles,  occupying  some  thirty  pages  ;  the 
second  chapter,  on  commerce  and  commercial  policy,  is 
divided  into  ten  sections  and  covers  more  than  a  hundred 
pages ;  and  there  follow  eighteen  more  chapters  on  various 
topics,  e.g.  money,  banks,  prices,  roads,  canals,  railways, 
statistics,  fisheries,  insurance,  interest,  population,  wages, 
poor  laws,  property,  successions,  revenue,  and  finance,  con- 
cluding with  a  chapter  entitled  miscellaneous.  The  index 
of  authors  gives  about  eight  hundred  names,  and  the  index 
of  books  about  double  that  number.  Even  in  1845  the 
work  only  professed  to  give  a  selection,  and  since  that  time 
attention  has  been  directed  to  many  works  not  noticed  by 
McCulloch,  of  high  value  in  economic  literature.  The 
number  of  works  that  have  been  written  since  1845  is 
enormous,  and  of  recent  years  the  rate  has  been  increasing 
B  1 


2  ELEMENTS  OF  POLITICAL  ECONOMY 

rapidly.  Some  idea  of  the  present  range  of  economic 
studies  may  be  formed  by  a  glance  at  Palgrave's  Diction- 
ary of  Political  Economy^  in  the  compilation  of  which  he 
had  the  assistance  of  nearly  two  hundred  experts.  It  is 
not  only  in  England,  or  even  principally  in  England, 
that  this  growth  of  economic  literature  is  observed.  In 
Germany,  Austria,  the  United  States,  in  France,  Italy, 
Switzerland,  and  Holland,  many  books  have  been  written 
in  ev-ery  department,- and  in  addition  there  are  a  number 
of  special  jouinaib  devoted  to  the  subject.  Such  and  so 
g-teeft'i's  ^'6  literature-  of  economics.  It  follows  at  once 
that  it  is  quite  impossible  to  give  any  adequate  idea  of 
this  literature  in  an  elementary  treatment  of  principles. 

At  the  same  time  it  may  be  observed  that  the  study  of 
economic  literature  is  probably  of  more  importance  than 
the  study  of  the  literature  of  almost  any  other  science.  In 
most  sciences  the  latest  authority  may  be  expected  to  have 
digested  or  at  least  to  have  congested  the  best  results 
of  his  predecessors.  But  in  economics  we  cannot  fully 
appreciate  the  real  meaning  of  fundamental  conceptions 
and  leading  principles  without  tracing  their  gradual  devel- 
opment. And  especially  if  we  wish  to  understand  the 
industrial  and  commercial  or  more  generally  the  economic 
history  of  a  people,  we  must  understand  the  ideas  by  which 
it  was  dominated  at  various  periods ;  and  in  his  standard 
work  on  the  economic  history  of  England  Dr.  Cunningham 
has  done  well  to  introduce  chapters  on  opinions,  ideas,  and 
theories,  although  economic  history  is  concerned  with  the 
positive  treatment  of  facts  and  institutions. 

There  are  also  great  advantages  to  the  student  in 
reading  at  first  hand  the  works  of  the  principal  writers. 


SCOPE   AND  METHODS  3 

Adam  Smith's  Wealth  of  Nations  cannot  be  reduced  to 
an  abstract,  and  the  attempt  to  frame  a  short  and  simple 
creed  of  economic  doctrine  out  of  this  ehiborate  work  was 
not  only  a  failure,  but  caused  very  great  miscliief.  And 
even  as  regards  many  forgotten  writers  and  obscure 
pamphlets,  it  is  surprising  what  may  be  gained.  The 
great  writers,  notably  Adam  Smith  himself,  fed  largely 
on  the  little  writers. 

The  history  of  the  development  of  economic  theories  is 
an  important  study  for  which  there  is  ample  material.  In 
the  present  survey  of  principles,  liowever,  it  can  only  be 
introduced  occasionally  by  way  of  illustration. 

2.  Of  the  Relation  of  Political  Economy  to  Other  Sciences. 
—  The  progress  of  all  the  sciences  has  been  associated  with 
ever  increasing  specialisation.  When  Adam  Smith  was 
Professor  of  Moral  Philosophy  in  the  University  of  Glas- 
gow, his  course  of  lectures  was  divided  into  four  parts. 
The  first  embraced  Natural  Theology ;  the  second.  Ethics 
in  the  narrow  sense  of  the  term  ;  the  third  examined  more 
at  length  "  that  branch  of  morality  which  relates  to  jus- 
tice," and  it  is  noteworthy  that  in  dealing  with  this  sub- 
ject he  adopted  largely  the  historical  method ;  and  in  the 
fourth  part  he  gave  the  lectures  which  were  afterwards 
expanded  into  the  Wealth  of  Nations.  His  course  on 
Ethics  was  the  foundation  of  tiie  essay  on  the  theory  of 
Moral  Sentiments  which  was  in  its  day  as  famous  as  his 
economic  work;  and  he  had  intended  to  develop  his  course 
on  jurisprudence  in  a  similar  way,  but  was  overtaken  by 
old  age  and  sickness.  The  separation  of  economics  from 
ethics  and  jurisprudence  was  an  example  of  the  necessity 
of  specialisation  after  a  certain  point  had  been  attained ; 


4  ELEMENTS  OF  POLITICAL  ECONOMY 

and  it  also  explains  the  emphasis  laid  in  the  Wealth  of 
Nations  on  one  part  of  social  and  political  life  to  the 
apparent  exclusion  of  interests  of  at  least  equal  impor- 
tance. So  far  from  underestimating  the  principles  of 
morality,  law,  and  religion,  lie  supposed  that  they  were  of 
such  importance  that  they  required  special  investigation. 
The  object  of  the  course  on  economics  is  recorded  by  one 
of  his  students  in  these  words:  "  In  the  last  part  of  his  lec- 
tures he  examined  those  political  regulations  which  are 
founded,  not  on  the  principle  of  justice^  but  on  that  of  ex- 
pediency^ and  which  are  calculated  to  increase  the  riches, 
the  power,  and  the  prosperity  of  a  state.  Under  this  view 
he  considered  the  political  institutions  relating  to  com- 
merce, finance,  and  to  ecclesiastical  establishments,"  and 
there  may  be  added  to  this  account,  the  expense  of  the 
administration  of  justice  and  of  the  provision  of  national 
education  in  the  broadest  sense  of  the  term. 

This  specialisation  of  economics  was  continued  by  the 
English  successors  of  Adam  Smith  with  few  exceptions, 
and  indeed  by  the  systematic  writers  it  was  carried  far- 
ther, that  is  to  say,  the  field  of  inquiry  was  contracted 
and  stress  was  laid  on  the  scientific  character  of  Political 
Economy  as  distinct  from  its  practical  applications. 
Recently  however,  in  the  reaction  against  this  excessive 
specialisation,  there  has  been  a  tendency  to  bring  in  on 
the  one  side  moral  and  political  considerations,  and  on 
the  other  to  give  the  science  a  more  practical  character 
in  relation  to  business  in  the  narrow  sense  of  the  term. 
Without  expressing  any  opinion  on  the  controversy 
involved,  regarding  this  change  of  attitude,  it  is  sufficient 
in  this  place  to  state  that  the  scientific  treatment  of  eco- 


SCOPE   AND  METHODS  5 

nomic  principles  and  methods,  to  the  exclusion  of  these 
various  moral  and  social  influences  and  of  various  prac- 
tical applications,  is  a  subject  of  sufficient  importance 
and  difficulty  for  specialisation,  and  forms  the  best  intro- 
duction to  these  wider  and  more  practical  applications. 
To  take  one  or  two  examples  :  the  theory  of  money  is 
a  necessary  preliminary  to  banking;  that  of  monopoly 
values,  to  trusts ;  that  of  wages  and  profits,  to  trade  unions ; 
that  of  the  incidence  of  taxation,  to  finance,  —  and  the 
list  might  be  extended  indefinitely.  It  is  not  too  much 
to  say  that  every  day  the  newspapers  offer  problems  that 
involve,  for  their  adequate  understanding  and  an  appre- 
ciation of  their  bearings,  the  use  of  economic  methods 
and  principles,  but  it  would  be  impossible  to  anticipate 
the  actual  problems  that  will  arise.  The  social  reformer, 
the  legislator,  and  the  man  of  business  (whose  name  is 
legion)  will  all  benefit  from  the  preliminary  study  of 
scientific  economics,  although  the  special  problems  in 
which  they  are  interested  are  not  treated  in  the  text- 
books. In  precisely  the  same  way  the  engineer  may 
benefit  from  mathematics,  the  miner  from  geology,  and 
the  navigator  from  astronomy,  although  the  industrial  arts 
are  not  directly  treated  of  in  the  corresponding  sciences. 

At  the  same  time  it  is,  no  doubt,  often  desirable  to 
illustrate  the  theory  by  reference  to  actual  or  historical 
examples  that  in  themselves  are  interesting  and  impor- 
tant; although,  on  the  other  hand,  in  certain  parts  it  is 
better  to  show  the  abstract  nature  of  the  treatment  by 
making  an  avowed  use  of  hypothetical  examples. 

3.  The  Scope  and  Definition  of  Political  Economy.  —  The 
scope  of  Political  Economy  may  be  indicated  by  show- 


6  ELEMENTS   OF   POLITICAL   ECONO:ay 

ing  its  relation  to  other  sciences.  It  must  be  classed 
with  the  group  of  moral  or  mental  sciences  because  it 
deals  primarily  with  human  beings  as  possessing  certain 
moral  or  mental  characteristics.  Its  fundamental  con- 
ceptions always  have  reference  to  qualities  of  mind.  It 
is  true  that  sometimes  physical  facts  are  of  great  im- 
portance. Thus,  it  is  often  said  that  the  laws  of  pro- 
duction partake  of  the  character  of  physical  laws,  e.g. 
the  law  of  diminishing  return ;  and  often  definite  appeals 
are  made  to  physical  facts  and  conditions,  e.g.  in  treat- 
ing of  the  causes  affecting  the  efficiency  or  the  degradation 
of  labour,  or  the  influence  of  natural  resources  and  cli- 
matic conditions  on  the  production  and  accumulation  of 
wealth.  But  the  end  in  view  is  not  the  mere  statement 
of  physical  facts,  but  their  relations  to  human  beings. 
Wealth  itself  is  treated  as  giving  pleasure  and  involv- 
ing effort,  and  not  as  possessing  weight,  extension,  or 
other  physical  characters ;  that  is  to  say,  it  is  considered 
from  the  human  standpoint.  During  the  first  half  of 
the  nineteenth  century  great  social  evils  arose  from  the 
materialisation  of  wealth,  or  forgetting  the  end  in  the 
means. 

Of  the  moral  sciences  some  treat  mainly  of  the  indi- 
vidual, e.g.  psychology,  some  of  the  social  relations  of 
human  beings,  e.g.  jurisprudence.  The  term  political, 
taken  in  its  original  sense,  implies  tliat  in  the  main 
economic  science  deals  with  man  in  his  social  relations. 
Sometimes,  no  doubt,  in  the  preliminary  explication  of 
conceptions,  it  is  useful  to  isolate  the  individual,  e.g.  in 
treating  of  utility  we  may  begin  with  the  direct  con- 
sumption of   the  individual.     Also  in  the  study  of  the 


SCOPE   AND  METHODS  7 

motives  to  action  we  may  begin  with  the  individual 
and  in  general  before  considering  the  probable  effects 
of  legal  regulations,  it  is  best  to  show  the  probable  re- 
sults, if  individuals  are  left  to  their  own  devices.  But 
the  object  in  view  is  always  to  discover  the  effect  on 
the  whole  society  or  some  group,  and  not  merely  on  the 
individual. 

Again,  in  its  mode  of  dealing  with  social  phenomena, 
political  economy  must  be  classed  with  the  positive 
sciences.  In  the  main,  it  deals  with  facts  and  not  with 
ideals ;  it  observes  certain  kinds  of  social  facts  in  order 
to  make  classifications,  and  to  discover  uniformities  and 
causal  connections.  It  describes  what  has  happened  in 
the  past,  or  is  actually  occurring  in  the  present,  and  will 
probably  occur  in  the  future  under  similar  conditions. 
I3ut  strictly  speaking  from  this  positive  standpoint,  it 
does  not  lay  down  moral  precepts  or  deliver  moral  judg- 
ments. And  the  reason  is  not  that  moral  and  religious 
elements  are  not  of  importance  in  practical  problems, 
but  simply  that  they  are  outside  the  sphere  of  economics. 
If  Adam  Smith  found  it  desirable  in  the  eighteenth  cen- 
tury to  separate  economics  from  morality  and  religion, 
that  is  to  say,  for  scientific  treatment,  the  presumption 
is  that  in  the  twentieth  century  this  specialisation  must 
be  retained.  And  it  is  observed  in  the  study  of  eco- 
nomic history,  that,  as  a  matter  of  fact,  the  economic 
elements  can  be  considered  apart.  No  doubt  the  moral 
and  the  religious  ideas  of  people  often  have  indirectly 
an  economic  influence,  but  again,  as  throughout,  it  is  a 
question  of  emphasis.  We  may,  for  example,  consider 
the  economic  aspects  of  the  meditcval  church  apart  from 


8  ELEMENTS  OF  POLITICAL   ECONOMY 

its  moral  or  religious  teaching.  And  similarly,  in  investi- 
gating present  conditions,  we  can  distinguish  between 
the  positive  examination  of  facts,  and  the  suggestion  of 
reforms  with  the  view  of  promoting  certain  ideals.  We 
may,  indeed,  in  some  cases  go  be^'ond  the  actual  facts 
and  pass  from  the  past  and  the  present,  to  the  future, 
and  consider  the  probable  effects  of  various  proposed 
economic  reforms.  But  even  here  we  are  in  the  domain 
of  facts  in  so  far  as  these  proposals  are  such  as  to  modify 
human  action  and  are  not  purely  imaginary.  Thus  we 
may  discuss  socialism,  and  consider  the  meaning,  the 
advantages  and  disadvantages,  etc.,  on  the  ground  that 
socialistic  ideas  influence  present  legislation  and  eco- 
nomic action  —  in  other  words,  the  socialistic  tendency 
of  much  modern  governmental  action  is  an  economic  fac- 
tor that  must  be  taken  account  of.  But  in  considering 
any  social  reform  or  proposed  remedy,  we  must  remem- 
ber that,  in  general,  there  are  more  than  the  economic 
elements  to  be  considered.  Wealth,  the  subject-matter 
of  economic  inquiry,  even  in  the  most  extended  mean- 
ing and  having  regard  to  its  remote  influences,  is  only 
one  element  of  civilisation,  and  often  not  the  most 
important. 

Political  economy,  then,  may  be  defined  as  the  science 
which  investigates  the  nature  and  the  causes  of  the 
wealth  of  nations ;  it  seeks  to  discover  the  laws  affecting 
the  production  and  the  consumption,  the  distribution  and 
the  exchange,  of  wealth.  All  of  these  terms,  it  will  appear 
in  the  sequel,  require  careful  analysis. 

4.  The  Uses  of  Definitions  in  Economics.  —  Most  m  ords 
used  in  economics  are  used  also  in  ordinary  language  or  at 


SCOPE  AND  METHODS  9 

any  rate  in  the  language  of  the  market-place,  and  there  are 
relatively  few  technical  terras.  The  question  then  natu- 
rally arises,  Why  should  we  waste  time  over  definitions  and 
explanations  when  the  words  are  already  familiar  ?  The 
answer  is  that  this  very  familiarity  is  deceptive  and 
sometimes  conceals  real  difficulties,  and  sometimes  leads 
to  positive  errors.  If  we  search  carefully  into  the  mean- 
inof  of  these  familiar  terms,  we  shall  often  be  led  to  notice 
important  facts  instead  of  stopping  at  a  verbal  explana- 
tion. For  a  long  time  people  were  accustomed  to  say  that 
wages  were  high  because  capital  provided  a  large  wages 
fund,  which  in  most  cases  had  no  more  meaning  than  the 
assertion  that  the  labourers  receive  much,  when  the  employ- 
ers pay  much,  in  wages.  But  the  inquiry  into  the  meaning 
of  this  familiar  expression  led  to  the  discovery  of  the  true 
relations  between  labour  and  capital.  Again,  people  were 
accustomed  to  say  that  the  fall  in  prices  that  set  in  in  gold- 
using  countries  after  1874  was  caused  b}^  the  appreciation 
of  gold,  and  in  most  cases  this  had  no  more  meaning 
than  the  statement  that  the  fall  in  prices  was  caused 
by  the  fall  in  prices.  But  the  inquiries  that  were  made 
as  to  the  meaning  of  these  expressions  were  again,  to  say 
the  least,  fruitful  in  their  results.  Real  difficulties  were 
exposed  and  some  advances  were  made  towards  their 
solution. 

But  very  often  this  familiar  use  of  economic  terms  led 
people  into  positive  errors,  and  even  governments  into 
mistaken  lines  of  action.  Most  of  the  crude  fallacies 
of  protection  can  be  exposed  by  the  careful  analysis  of 
the  terms  employed.  The  idea,  formerly  so  prevalent  and 
still  not  extinct,  that  the  advantage  of  foreign  trade  can 


10  ELEMENTS   OF   POLITICAL   ECONOMY 

be  measured  by  the  excess  of  exports  over  imports  is 
shown  to  be  fallacious  by  analysing  the  terms.  Similarly 
also,  many  of  the  popular  fallacies  regarding  the  connec- 
tion between  labour  and  prices,  consumption  and  pro- 
duction, low  wages  and  cheap  labour,  may  be  got  rid  of 
by  a  consideration  of  what  ideas  the  words  stand  for. 
It  is  true  that  in  all  these  cases  much  more  than  verbal 
analysis  is  required,  but  in  all  cases  also  it  is  a  necessary 
preliminary. 

Some  of  the  definitions  of  terms  in  constant  use  prove 
on  inquiry  to  involve  such  difficulties  that  a  simple  defi- 
nition is  impossible,  e.g.  capital,  money,  etc.  Accordingly 
it  is  found  desirable  to  lay  down  certain  rules  for  defi- 
nitions in  economics.  The  rules  now  generally  accepted 
are  as  follows  :  — 

5.  Rules  for  Definitions.  —  (1)  As  far  as  possible  our 
definition  should  coincide  with  the  best  popular  usage. 
Otherwise,  if  a  writer  gives  a  different  meaning  in  the 
course  of  his  argument,  he  may  be  led  by  association  to 
use  the  term  in  its  popular  sense,  and  thus  be  involved 
in  error ;  or  even  if  he  himself  escapes  the  confusion,  his 
argument  may  be  misunderstood  and  misquoted.  This 
difference  between  the  popular  and  the  quasi-technical 
usage  is  the  source  of  many  of  the  popular  delusions  re- 
garding the  teachings  of  economists.  Thus,  for  example, 
in  the  pure  theory  of  economic  rent,  the  term  is  used  in 
a  sense  far  more  narrow  than  the  popular  meaning. 
The  proposition  that  with  the  progress  of  society  rents 
tend  to  rise  was  only  lield  in  reference  to  these  economic 
rents,  but  when  used  in  popular  arguments  in  reference 
to  uneained   increments   the  wider   meaning   was   given. 


SCOPE  AND  METHODS  11 

Similarly,  the  economic  use  of  the  terms  labour  and 
wages  is  much  wider  than  in  popular  discourse ;  and 
propositions  which  economists  have  framed  with  regard 
to  labour  in  the  wide  sense  are  repeated  with  the 
narrower  meaning.  In  the  economic  sense  all  wealth 
may  be  said  to  be  the  result  of  labour,  if  we  include  the 
highest  professional  skill,  the  labour  of  '•'first  occupancy," 
and  an  endless  number  of  forms  of  human  activity  be- 
sides mere  manual  labour.  But  too  often,  in  popular 
discussions,  what  is  attributed  by  the  economists  to  labour 
in  general  is  confined  to  manual  labour  in  particular. 

The  only  safeguard  seems  to  be  to  make  a  liberal  use  of 
qualifying  adjectives,  so  as  to  indicate  the  precise  meaning 
intended.  Thus  the  money  of  the  money  market  consists 
only  to  a  small  extent  of  actual  coin  or  even  notes,  whilst 
on  the  other  hand  a  large  part  of  gross  profits  in  economic 
analysis  appears  as  a  form  of  wages.  It  is  often  of  the 
highest  practical  importance  to  distinguish  between  the 
diiferent  forms  of  money  and  the  different  forms  of  wages, 
and  the  distinctions  are  best  indicated  by  the  use  of 
appropriate  qualifying  terms,  e.g.  standard  money,  wages 
of  management,  etc. 

(2)  The  second  rule,  closely  connected  with  the  first 
is  that  definitions  should  not  be  made  too  rigid  or  precise. 
The  nature  of  the  subject  does  not  admit  of  the  accuracy 
that  is  possible  in  some  parts  of  mathematics.  Conceptions 
and  ideas  which  are  very  different  in  extreme  cases  often 
overlap  or  admit  of  debatable  margins.  The  recognition 
of  continuity,  and  of  resemblance  in  difference,  is  much 
insisted  on  by  recent  writers.  It  is  usual  to  say  that  there 
■  are  three  great  agents  of  production  of  wealth  :  namely, 


12  ELEMENTS  OF  POLITICAL  ECONOMY 

land,  labour,  and  capital.  And  in  simple  cases  nothing  can 
be  more  clear  than  the  differences  implied.  In  north- 
west Canada  we  distinguish  readily  and  clearly  between 
the  land,  the  labour  of  the  immigrants,  and  the  ploughs 
and  other  implements  which  they  have  to  purchase.  Land, 
capital,  and  labour  seem  quite  different  in  kind.  But  on 
analysis  in  a  complex  industrial  society,  the  distinctions 
are  often  by  no  means  clear.  Thus  labour  and  capital  are 
in  many  respects  so  much  alike  that  Adam  Smith  includes 
the  natural  and  acquired  abilities  of  a  people  under  the 
fixed  capital;  similarly  also,  for  many  purposes,  land  is 
placed  under  capital. 

(3)  In  different  parts  of  the  subject,  stress  is  laid  on 
different  characteristics  of  a  complex  conception ;  and 
it  is  advisable  to  begin  with  provisional  definitions  of  a 
general  character  and  later  on  to  frame  special  definitions 
for  special  purposes.  Thus,  we  may  begin  with  a  defini- 
tion of  money  which  calls  attention  to  its  function  as  a 
general  medium  of  exchange,  and  later  the  special  function 
of  legal  tender  may  be  made  prominent. 

(4)  After  all,  it  must  be  remembered  that  "  words  are 
the  servants  of  things  "  and  in  some  cases  it  may  be  desir- 
able to  make  a  new  technical  term  or  to  give  to  an  old 
term  a  special  meaning.  Some  writers  have  maintained 
that  in  scientific  language  we  ought  only  to  use  scientific 
terms.  "  In  each  particular  science  we  are  never  concerned 
to  know  what  are  the  meaning's  attached  to  the  term 
either  in  vulgar  parlance  or  in  any  other  science  "  (Pan- 
taleoni).  But  it  ma}^  be  objected  that  economic  science 
draws  much  of  its  materials  from  facts  expressed  in  com- 
mon language,  and  to  understand  the  facts  we  must  exam- 


SCOPE  AND  METHODS  13 

ine  the  language ;  and  even  pure  economics,  to  be  of  any 
value,  must  not  be  so  abstract  as  not  to  be  capable  of 
application  to  the  actual  world.  And  again,  political 
economy  also  draws  largely  from  other  sciences,  and  it 
would  cause  endless  confusion  if  the  words  are  to  be 
employed  in  totally  different  senses.  The  better  opinion, 
then,  seems  to  be  that  technical  terms  ought  not  to  be 
multiplied  beyond  necessity.  The  use  of  a  new  word  is  a 
very  different  thing  from  the  discovery  of  a  new  idea. 

(5)  It  is  sometimes  useful  to  supplement  the  positive 
definition  by  considering  the  opposite  —  to  state  not  only 
what  is  included,  but  also  what  is  excluded.  Thus,  the 
meaning  of  equality  of  taxation  may  be  clarified  by  refer- 
ence to  the  marks  of  inequality.  In  the  same  way,  when 
we  test  our  definitions  by  instances  —  in  logical  phrase 
the  connotation  by  the  denotation  —  it  is  well  to  take 
examples  of  the  negative  as  well  as  of  the  positive. 

(6)  Finally,  it  may  be  added  that  just  as  it  is  well  not 
to  diverge  from  the  popular  meaning  without  cause,  so 
also,  if  a  quasi-technical  meaning  has  been  generally 
adopted  by  economic  writers,  that  meaning  should  not  be 
altered  without  sufficient  reason.  If  every  writer  is  to 
give  his  own  shade  of  meaning  to  every  term,  a  vast  amount 
of  unnecessary  labour  will  be  required. 

6.  The  Methods  of  Political  Economy.  —  Economists  have 
used  two  distinct  methods,  or  rather  groups  of  methods, 
to  which  different  significant  names  are  applied  accord- 
ing to  the  stress  laid  on  different  characteristics. 

In  the  first  place,  we  have  the  methods  known  accord- 
ing to  their  special  uses  as  deductive,  a  priori^  abstract, 
hypothetical,  mathematical,  analytical,  etc. ;  and  secondly, 


14  ELEMENTS   OF   POLITICAL   ECONOMY 

we  have  the  methods  styled  inductive,  positive,  a  pos- 
teriori, historical,  comparative,  etc. 

In  the  typical  deductive  method  we  start  with  cer- 
tain broad  facts,  obvious  from  observation,  or  with  prin- 
ciples supposed  to  be  already  established.  From  these 
general  propositions  we  deduce  some  particular  conclu- 
sion. We  then  refer  to  experience  to  test  or  verify  this 
deduction.  Then  if  we  discover  that  there  is  not  an 
exact  coincidence,  we  try  to  discover  the  disturbing 
causes. 

In  the  typical  inductive  method  we  start  with  the 
observation  and  classification  of  concrete  facts  and  ascend 
to  general  principles.  We  may  conversely  test  our  in- 
ductions by  using  them  as  the  basis  of  new  deductions. 

In  its  extreme  form  the  deductive  method  starts  with 
hypotheses,  and  proceeds  to  draw  conclusions  by  the 
aid  of  mathematics.  It  is  possible  that  the  hypotheses 
may  be  so  remote  from  facts  that  the  only  use  of  the 
method  in  this  form  is  didactic.  Similarly  also,  in  its 
extreme  form  the  inductive  method  may  never  advance 
beyond  the  first  stage,  namely,  the  collection  or  observa- 
tion of  facts.  Masses  of  facts  have  been  recorded  by 
various  royal  commissions  in  England,  which  are  stored 
away  in  blue  books.  Again,  in  the  works  of  Anderson, 
Macpherson,  Eden,  Tooke,  Newmarch,  Rogers,  Vicomte 
d'Avenel,  and  many  other  economic  historians,  only  a 
relatively  small  part  of  the  material  has  been  used  for 
scientific  purposes. 

On  the  other  hand,  however,  even  the  most  extreme 
forms  of  the  deductive  method  have  often  led  to  a  more 
adequate  and  true  interpretation  of  facts ;  and  again,  the 


SCOPE   AND   METHODS  15 

collections  of  facts  and  figures  which  had  been  set  aside 
as  useless  have  come  to  be  of  the  highest  importance. 

It  is  now  generally  admitted  tliat  all  these  various 
methods,  or  these  various  forms  of  the  deductive  and 
inductive  methods,  are  applicable  in  various  cases.  In 
certain  parts  of  the  subject,  e.g.  in  the  theory  of  value 
and  of  money  and  prices,  it  is  necessary  in  the  first 
place  to  begin  with  the  deductive  method  and  to  use 
hypotheses.  In  other  parts,  e.g.  in  considering  the  causes 
of  the  efficiency  of  labour,  or  the  effects  of  climate  on 
production,  induction  is  necessary  from  the  outset.  In 
the  present  survey  numerous  examples  will  occur  of 
these  various  methods,  so  that  further  illustration  is 
unnecessary. 

7.  The  Laws  of  Political  Economy.  —  The  conclusions 
arrived  at  by  the  use  of  these  various  methods  are  in 
some  cases  styled  the  laws  of  political  economy.  This 
phrase  has  been  much  misunderstood,  and  requires  care- 
ful analysis.  The  meaning  of  the  expression  may  be  con- 
sidered with  advantage  both  positively  and  negatively. 

(1)  Positively,  the  laws  of  political  economy  may  be 
divided  into  two  classes,  according  as  the  conclusions  on 
which  they  are  based  are  obtained  from  the  use  of  the 
deductive  or  the  inductive  methods  respectively. 

The  laws  due  to  the  deductive  method  are  in  general 
abstract  or  hypothetical,  and  so  long  as  the  conditions 
laid  down  hold  good  they  are  necessarily  true.  That  is 
to  say,  if  the  premises  are  admitted,  the  conclusion 
depends  simply  on  correct  reasoning.  Take,  for  example, 
Gresham's  law,  which  in  its  popular  form  states  that  bad 
money  drives  good  money  from  circulation.     So  long  as 


16  ELEMENTS  OF  POLITICAL   ECONOMY 

the  conditions  are  fulfilled,  the  result  follows.  But  in 
practice  it  rarely  happens  that  the  conditions  answer  the 
strict  requirements  of  the  theory.  Even  in  this  relatively 
simple  case  we  often  find  bad  and  good  money  circulat- 
ing side  by  side.  Generally  it  may  be  said  that  these 
abstract  or  hypothetical  laws  are  only  true  in  the  absence 
of  disturbing  causes. 

The  laws  due  to  the  inductive  method  are  in  general 
empirical,  and  cannot  be  far  extended  in  time  or  space. 
That  is  to  say,  the  probability  is  that  in  different  times 
and  places  there  will  be  an  essential  change  in  the  con- 
ditions. Thus,  the  law  of  population  laid  down  by  Mal- 
thus  was  based  on  an  inductive  inquiry,  and  was  carefully 
worded.  But  as  popularly  expressed  in  a  summary  form, 
it  is  supposed  to  state  that  population  will  always  increase 
if  food  increases.  In  certain  cases  this  generalisation  is 
adequate  and  correct;  the  recent  experience,  however, 
of  several  great  countries,  notably  France,  shows  that  the 
law  in  this  summary  form  does  not  hold  good.  Simi- 
larly, all  arguments  that  are  based  on  appeals  to  history 
or  to  the  experience  of  other  countries,  or  in  other  words, 
all  the  so-called  laws  due  to  the  historical  and  compara- 
tive methods,  can  only  be  safely  applied  to  new  cases  if 
we  are  assured  that  the  essential  conditions  are  similar. 
It  follows,  generally,  that  the  laws  of  political  economy 
when  applied  to  the  explanation  of  facts,  or  the  advo- 
cacy (or  condemnation)  of  proposed  reforms,  have  vary- 
ing degrees  of  force.  In  the  classical  phrase  they  express 
tendencies  only,  and  are  liable  to  be  counteracted. 

(2)  Negatively,  economic  laws  are  to  be  distinguished 
both  from  legal  enactments  and  from  moral  rules;  they 


SCOPE  AND  METHODS  17 

are  not  commands  or  imperatives.  It  is  one  thing  to 
point  out  the  meaning,  causes,  and  effects  of  certain  lines 
of  conduct,  and  quite  another  to  assert  that  therefore 
certain  rules  ought  to  be  obeyed.  When  the  authority  of 
the  classical  economy  was  at  its  height  in  popular  estima- 
tion, no  phrase  was  more  in  vogue  in  political  discussions 
than  "  contrary  to  the  laws  of  political  economy."  In  par- 
ticular any  interference  with  freedom  of  contract  was  sup- 
posed to  offend  against  these  laws.  All,  however,  that 
economic  science  does  with  regard  to  freedom  of  contract 
is  to  explain  what  will  happen  if  people  are  left  free ;  and 
in  some  cases  the  obvious  conclusion  from  the  inquiry  is, 
that  in  the  interests  of  justice  or  morality  or  public  ex- 
pediency such  freedom  ought  to  be  restrained. 

Sometimes,  it  is  true,  this  scientific  attitude  of  econo- 
mists is  overstrained.  In  certain  cases  the  only  elements 
of  importance  are  economic.  Indeed,  one  principal  mean- 
ing of  economy  is  the  least  wasteful  or  most  effective 
means  to  attain  any  given  end,  as,  for  example,  when  we 
speak  of  the  economic  employment  of  time,  labour,  or 
money.  And  yet,  even  in  these  cases  it  may  sometimes  be 
desirable  on  moral  or  social  grounds  to  adopt  the  more 
expensive  or  less  economical  methods. 

8.  The  Difficulties  of  Economic  Studies.  —  The  student 
must  be  prepared  to  meet  with  different  kinds  of  difficul- 
ties in  economics.  Sometimes  the  object  is  to  ascertain 
by  a  kind  of  Socratic  induction  the  meanings  of  popular 
terms  and  the  content  of  popular  conceptions ;  or  the 
difficulty  may  consist  in  a  complete  or  adequate  enumera- 
tion of  details  with  a  reasoned  classification,  e.g.  in  esti- 
mating the  relative  advantages  of  cultivation  on  a  large 


18  ELEMENTS  OF  POLITICAL  ECONOMY 

and  on  a  small  scale  in  agriculture  ;  or,  again,  the  strain 
of  attention  may  be  diverted  to  abstract  principles  which 
require  for  their  development  mathematical  methods,  as  in 
most  parts  of  the  theory  of  value ;  sometimes  the  appeal 
to  history  is  the  main  difficulty,  as  in  considering  the 
effects  of  the  navigation  acts  or  the  origin  of  trade 
unions  —  and  here  the  labour  is  increased  if  the  historical 
is  supported  by  the  comparative  method,  as  in  tracing  the 
development  and  decay  of  village  communities  ;  in  cer- 
tain parts  of  the  subject  we  come  in  contact  with  the 
principles  of  jurisprudence  and  ethics,  as  in  discussing 
the  economic  bases  of  private  property  or  the  laws  of 
bequest  and  inheritance ;  and,  finally,  in  the  pursuit  of 
descriptive  and  realistic  economics,  the  student  may  have 
to  contend  on  the  one  side  with  the  facts  of  commercial 
geography,  and  on  the  other  with  the  methods  of  statistics 
by  which  he  will  again  be  brought  back  to  mathematical 
abstractions.^ 

1  Cf.  Principles  of  Political  Economy,  by  H.  Sidgwick,  "Introduction" ; 
The  Scope  and  Method  of  Political  Economy,  by  J.  N.  Keynes ;  Intro- 
duction to  the  Study  of  Political  Economy,  by  Luigi  Cossa  (translated 
by  L.  Dyer)  ;  The  Elements  of  Statistics,  by  A.  L.  Bowley  ;  Cours  d^£co- 
nomie  Politique  (Tome  1),  by  V.  Pareto, 


BOOK  I 

CONSUMPTION  AND  PRODUCTION 


CHAPTER  I 

■WEALTH,   UTILITY,   AND   CONSUMPTION 

1.  The  Popular  Conception  of  Wealth.  —  Political  Economy 
is  the  science  of  wealth,  and  logically  the  first  problem  is 
to  give  a  definition  of  wealth.  Referring  to  the  rules  of 
definition,  we  may  first  take  the  definition  of  wealth  which 
is  the  best  known  and  most  popular.  "Wealth  consists 
of  all  useful  or  agreeable  things  which  possess  exchange 
value  ;  or  in  other  words,  all  useful  or  agreeable  things 
except  those  which  can  be  obtained  in  the  quantity  desired 
without  labour  or  sacrifice"  (Mill).  At  first  sight  this 
seemed  simple  enough,  but  as  soon  as  the  definition  came 
to  be  tested  by  particular  cases  all  sorts  of  difficulties 
were  discovered.  Must  the  things  be  material?  Is  the 
wealth  of  a  nation  simply  the  aggregate  of  that  of  its 
individual  members?  Is  the  wealth  of  the  nation  to  be 
measured  by  its  exchange  value?  Is  exchange  value 
essential  to  national  wealth  ?  A  vast  amount  of  ingenuity 
was  exercised  in  the  discussion  of  these  questions,  and  it 
became  clear  that  wealth  is  a  complex  conception  which 
demands  a  careful  analj'sis. 

2.  The  Economic  Analysis  of  Wealth.  —  In  the  popular 
definition  there  are  implied  several  distinct  ideas  each  of 
which  requires  careful  exposition ;  namel3%  utility,  valuo, 
labour,  and  appropriation.  That  is  to  say,  the  things  that 
are  included  under  wealth  are  in  general  the  result  of 

21 


22  ELEMENTS   OF   POLITICAL   ECOXOMY 

labour ;  they  possess  exchange  value ;  they  are  appropri- 
ated ;  and  in  all  cases  they  must  possess  utility.  It  is  found, 
also,  that  in  different  departments  and  in  different  prob- 
lems the  emphasis  is  laid  with  varying  force  on  these 
fundamental  ideas.  Thus,  in  consumption  the  stress  is  on 
utility,  in  production  on  labour,  in  distribution  on  appro- 
priation, in  exchange  on  value  ;  whilst  in  dealing  with 
economic  progress  and  with  the  economic  functions  of 
government,  the  relative  importance  of  these  ideas  varies 
at  different  points.  It  is  not  implied,  however,  that  the 
attention  is  exclusively  directed  in  production,  only  to 
labour;  or  in  distribution,  only  to  appropriation;  and  that 
in  exchange,  value  alone  is  considered.  Some  writers 
make  value  fundamental  in  distribution,  and  in  any 
account  of  value  reference  must  be  made  to  the  agents 
of  production,  e.g.  labour.  In  fact,  it  is  only  for  scien- 
tific purposes  that  this  logical  separation  of  departments 
can  be  made.  But  logical  separation  of  some  kind  is  nec- 
essary for  the  scientific  treatment  of  any  complex  phe- 
nomena. We  may  consider  first  utility  and  consumption, 
to  which,  since  Mill,  the  attention  of  economists  has  been 
largely  directed.  It  is  now  possible  to  present  the  main 
results  in  a  simple  form,  though  some  of  the  deductions 
and  applications  are  still  open  to  controversy. 

3.  Utility  and  Disutility.  —  By  the  utility  of  a  thing  we 
mean  its  power  to  satisfy  a  desire  or  serve  a  purpose.  To 
what  extent  this  satisfaction  is  accompanied  by  pleasure 
or  happiness,  or  is  really  beneficial  to  the  individual  or  to 
society,  are  matters  for  special  inquiry ;  but  to  begin  with 
we  need  a  term  that  is  neutral  or  colourless.  Utility  in 
this  wide  sense  lies  at  the  root  of  demand,  and  there  is  no 


WEALTH,  UTILITY,  AND  CONSUMPTION  23 

doubt  that,  whether  we  consider  individuals,  or  social 
classes,  or  a  whole  nation,  there  are  extensive  demands  for 
things  that  are  productive  of  misery  and  degradation. 
But  these  things  to  these  people  possess  utility  in  the 
sense  that  they  satisfy  their  desires.  Disutility  is  simply 
negative  utility.  It  thwarts  the  satisfaction  of  desires. 
Where  utility  causes  pleasure  disutility  causes  pain ; 
where  utility  is  beneficial  disutility  is  injurious ;  in  a 
wide  or  a  narrow  sense  the  one  is  the  opposite  of  the 
other.  It  may  be  observed  that  throughout  the  whole 
range  of  economics  this  opposition  is  of  importance. 

4.  The  Relativity  of  Utility.  —  Although  we  speak  of 
the  utility  being  in  the  things,  a  little  reflection  shows 
that  the  term  utility  has  no  meaning  except  in  reference 
to  human  beings.  This  is  implied  in  the  expression, 
the  satisfaction  of  desire.  It  might  be  thought  that  prac- 
tically the  point  is  not  of  much  importance.  In  the  same 
way  it  may  be  said  colours  and  other  qualities  of  material 
things  have  only  a  meaning  in  reference  to  sentient  beings, 
but  for  all  practical  purposes  we  may  say  the  rose  is  red, 
and  so  on,  without  descending  into  the  mysteries  of  psy- 
chology or  metaphysics. 

In  the  case  of  utility,  however,  this  relativity  is  often 
of  the  greatest  importance.  The  utility  assigned  to 
things  is  subject  to  all  kinds  of  variations,  and  it  is 
to  the  scientific  examination  of  these  causes  of  variation 
that  much  of  the  change  in  the  statement  of  economic 
theory  since  Mill  is  to  be  ascribed.  In  particular,  there 
is  the  distinction  between  marginal  (or  final)  and  total 
utility. 

5.  Economic  Meaning  of  Consumption.  —  The  object  of 


24  ELEMENTS  OF  POLITICAL  ECONOMY 

consumption  is  to  satisfy  desire.  This  simple  statement 
needs  no  illustration ;  but,  as  is  generally  the  case  in 
economic  conceptions,  we  easily  pass  from  the  obvious  to 
the  paradoxical.  And  the  reason  is  the  continuity  of 
economic  conceptions.  Logically,  we  may  class  as  con- 
sumable commodities  all  things  that  possess  utility.  Thus 
sunshine  is  a  consumable  commodity.  It  is  true  that  it 
has  none  of  the  other  marks  of  wealth;  but,  fortunately 
for  human  beings,  many  even  of  the  necessaries  which 
they  consume  are  not  wealth,  though  according  to  the 
old  term  they  are  riches. 

The  example  of  sunshine  introduces  another  point. 
In  some  cases  the  consumption  of  things  destroys  wholly 
or  partially  their  utility.  But  this  is  not  always  the  case. 
Pictures  may  be  gradually  destroyed  by  time,  etc.,  but 
not  by  being  looked  at,  which  is  their  real  consumption. 
Houses  are  consumable  commodities,  and  so  are  the  lands 
on  which  they  are  built.  The  houses  are  gradually  de- 
stroyed by  consum]3tion,  but  their  sites  remain. 

6.  Total  and  Marginal  Utility.  —  As  already  stated,  the 
utility  assigned  to  or  derived  from  things  is  subject  to 
variation.  Even  when  we  consider  the  same  individual 
and  the  simplest  case  of  consumption,  the  utility  is  found 
to  vary.  To  begin  with,  we  may  suppose  that  as  con- 
sumption is  increased  desire  is  satiated,  and  in  conse- 
quence less  satisfaction  is  derived  from  further  portions 
of  the  thing. 

The  utility  derived  from  the  last  portion  consumed  is 
called  the  marginal  (or  final)  utility.  The  aggregate  of 
the  utilities  of  all  the  portions  is  the  total  utility. 

It  is  important  to  notice  that  the  marginal  utility  is 


WEALTH,  UTILITY,  AND  CONSUMPTIOX  25 

not  necessarily  or  even  generally  zero.  On  the  one  side, 
it  may  well  happen  that  tlie  consumer  would  gladly  con- 
sume more  if  he  could  get  it,  and  on  the  other,  he  may 
by  excess  pass  through  the  zero  point  to  disutility.  As 
regards  direct  consumption  (as  distinct  from  the  acqui- 
sition of  commodities),  the  general  rule  is  that,  to  begin 
with,  for  small  amounts,  the  utility  of  the  successive 
portions  increases;  then,  after  a  certain  point  is  reached,  it 
continuously  diminishes  to  zero,  and  then  passes  into 
disutility  that  also  continuously  increases.  Consider,  for 
example,  the  consumption  of  water  —  from  a  few  drops  to 
the  torture  of  the  Inquisition. 

If  disutility  is  involved,  we  must  deduct  the  amount  in 
estimating  the  total  utility.  Thus  it  is  possible  that  the 
total  utility  may  be  negative.  The  fall  in  utility  (after 
a  certain  point  is  reached)  is  often  referred  to  as  the  law 
of  diminishing  utility  and  is  best  illustrated  by  a  graph.^ 

The  fall  in  utility  refers  to  the  successive  portions  and 
not  to  the  aggregate  utility.  So  long  as  the  utility  re- 
mains positive,  the  total  utility  increases,  though  at  a 
lessening  rate  till  the  zero  point  is  reached,  after  which 
the  total  utility  diminishes  as  the  disutility  increases. 

Even  in  this  simplest  case,  that  is  to  say,  the  direct 
consumption  of  an  individual,  there  are  certain  questions 
to  be  answered  (e.g.  so  long  as  any  consumption  is  volun- 
tary, can  it  be  said  to  cause  disutility  in  the  sense  defined?), 
but  the  real  difficulties  begin  when  we  pass  from  the  in- 
dividual to  the  social  group  or  the  nation.  And  it  may 
be  noted  that  many  fallacies  have  arisen  in  all  parts  of 
economics  from  supposing  that  what  is  true  of  an  indi- 
1  See  note  appended  to  this  chapter. 


26  ELEMENTS  OF  POLITICAL  ECONOMY 

vidual  in  isolation  is  true  of  any  number  taken  together. 
In  general  the  transition  cannot  be  made  so  easily. 

7.  Transition  from  the  Individual  to  the  Nation.  — We 
may  pass  from  the  individual  to  the  class  and  the  nation 
in  two  modes.  (1)  The  individual  may  be  taken  as  a 
representative  type.  (2)  By  the  aid  of  statistics  we  may 
construct  an  average.  The  value  of  the  former  plan 
depends  on  how  far  the  case  taken  is  fairly  representative ; 
that  of  the  latter,  on  the  way  the  average  is  obtained. 
In  the  first  plan,  if  we  simply  assert  that  what  is  true 
of  A  is  true  of  all  people  exactly  similar,  the  statement  is 
only  formal.  In  the  second  plan  we  may,  if  the  figures 
are  given,  estimate  the  consumption  per  head  of  the 
whole  nation  of  all  kinds  of  things  ;  and,  indeed,  this  is 
one  of  the  most  popular  methods  of  estimating  material 
progress.  In  England,  for  example,  during  the  last  fifty 
years  there  has  been  a  great  increase  per  head  in  the  con- 
sumption of  tea,  sugar,  etc.  But  we  cannot  say  that  any 
law  of  diminishing  utility  applies  to  this  general  (or  per 
head)  consumer.  And  in  this  connection  it  may  be 
observed  that  the  utility  of  the  same  things  will  depend 
on  the  way  in  which  they  are  distributed,  as  well  as  on 
variations  in  the  capacities  of  the  recipients. 

When  we  consider  the  variety  of  individuals  of  which 
a  nation  is  made  up,  of  all  sorts  of  ages  and  capacities,  it 
seems  probable  that  the  variations  in  the  utility  of  con- 
sumption can  only  be  estimated  in  the  roughest  and  most 
indirect  methods.  These  points,  however,  are  best  taken 
up  in  Book  IV,  which  deals  with  economic  progress. 

8.  The  Measurement  of  Utility  by  Money  —  Consumer's 
Surplus.  —  In  modern  societies  people  make  few  things  for 


WEALTH,  UTILITY,  AND  COXSUMPTION  27 

their  own  personal  consumption,  and  in  general  must 
obtain  their  goods  by  purchase.  Thus  the  utility  of  con- 
sumption is  closely  associated  -with  the  trouble  or  dis- 
utility of  acquisition.  We  may  suppose  that  any  person 
regards  the  spending  of  money  as  involving  in  itself 
disutility,  as  in  any  case  it  deprives  him  of  the  pleasure 
of  possession,  etc.  Thus  we  may  say  that  a  prudent  con- 
sumer will  try  so  to  adjust  his  expenditure  that  in  return 
for  this  disutility  of  expenditure  he  may  obtain  a  maxi- 
mum of  utility. 

It  is  easy  to  show  theoretically  (especially  with  the 
aid  of  graphs)  that  the  expenditure  should  be  so  con- 
ducted that  the  marginal  utility  in  each  case  is  equal.  If 
it  is  less  in  some  case,  too  much  has  been  spent  on  that 
thing;  if  it  is  more,  too  little. 

It  may  also  be  shown  that  this  final  utility  should  at 
least  balance  the  final  disutility  of  expenditure. 

As  regards  most  incomes  it  may  be  supposed  that  the 
spender  has  a  surplus  of  utility,  and  in  some  cases  a  very 
great  surplus.  Thus  when  we  take  into  account  the  law 
of  diminishing  utility  we  see  that  the  utility  derived  from 
the  first  portions  of  necessaries  may  be  indefinitely  great. 
But  owing  to  the  equality  of  prices  the  same  price  is  paid 
per  unit  for  each  portion  —  for  the  first  as  for  the  last. 
Accordingly,  if  the  last  purchase  just  balances  the  loss  of 
the  money,  all  the  former  purchases  must  give  a  surplus. 
If  we  add  together  these  gains,  or  these  savings  from  what 
the  man  would  have  been  willing  to  give,  they  constitute 
for  that  thing  to  that  consumer  what  is  called  the  con- 
sumer's surplus  (or  rent,  on  an  analogy  to  be  explained 
later). 


28  ELEMENTS  OF  POLITICAL  ECONOMY 

Considering  the  limitation  of  incomes,  it  is  possible  that 
the  last  penny  spent  may  yield  a  surplus.  It  is  only  when 
there  is  some  money  left  over  that  the  loss  by  the  last 
penny  will  just  balance  the  gain. 

In  any  case,  "  We  cannot  speak  of  price  measuring 
marginal  utility  in  general,  but  onl}^  with  reference  to 
some  individual  purchaser"  (Marshall). 

It  would  seem,  then,  that  the  measurement  of  utility 
by  money  is  something  like  measuring  the  heights  of 
creatures  in  terms  of  their  own  feet.  But  then  it  may 
be  replied  that  the  standard  foot  is  actually  derived  from 
this  mode  of  measurement,  and  similarl}^  of  most  measures 
they  are  connected  with  variable  natural  objects. 

I  have  dealt  with  these  difficulties  elsewhere,  and  here 
I  will  only  suggest  that  the  advantages  supposed  to  be 
measured  by  consumer's  surplus,  or  rent,  may  be  expressed 
in  more  general  terms  without  any  loss  in  precision. 

Every  person  has  a  limited  income,  and  in  consequence, 
since  the  modes  of  expenditure  and  his  desires  may  be 
considered  as  unlimited,  he  could  always  gain  in  utility 
by  an  increase  of  income.  If,  then,  owing  to  any  cause, 
some  of  the  things  which  he  ordinarily  consumes  fall  in 
price  (his  income  and  other  things  remaining  the  same), 
he  has  more  money  to  spend,  and,  just  as  by  an  increase 
of  income,  he  can  gain  in  utility.  He  may  buy  more  of 
the  old  things,  or  better  qualities,  or  new  things.  Or  he 
may  save  the  money  for  future  needs.  The  real  gains  of 
increasing  cheapness  and  plenty  can  onl}^  be  estimated 
in  a  variety  of  ways  ;  the  nominal  gain  is  tlie  saving  of 
money  on  the  things  formerly  bought.  It  is  sometimes 
useful,  from  the  national  standpoint,  to  compare  the  cost 


WEALTH,  UTILITY,  AND  CONSUMPTION 


29 


of  things  at  present  prices  (say  the  total  imports)  with 
the  cost  if  prices  had  been  unchanged. ^ 

Note  on  the  Use  of  Curves  in  Economics  —  Utility  Curves 

In  the  pure  theory  of  economics  the  nature  and  relations  of  some  of 
the  fundamental  conceptions  can  be  most  clearly  shown  by  the  use  of 
curves.  Curves  of  this  kind  intended  for  the  illustration  of  abstract 
theories  are  always  drawn  with  the  proviso  of  hypotheses  carefully 
laid  down.  They  are  not  supposed  to  represent  the  results  of  statis- 
tical inquiries.  For  abstract  purposes  cm-ves  may  be  of  great  use 
when  it  is  quite  impossible  to  obtain  the  corresponding  statistics. 
The  principal  use  of  curves  of  a  simple  kind  is  to  illustrate  in  a 
graphical  form  the  continuous  variations  in  the  quantity  of  one  thing 
in  response  to  changes  in  tlie  quantity  of  another  (or  the  connection 
between  changes  in  the  independent  and  in  the  dependent  variable). 
Thus,  as  regards  utility,  the  leading  ideas  and  their  interconnections 
may  be  represented  by  the  following  curves :  — 


Fig.  2 


Successive  portions  of  the  commodity  are  measured  along  OX  and 
the  corresponding  degrees  of  utility  along  OY.  In  Fig.  1  for  a  time 
there  is  an  increase  of  utility,  but  after  a  point  is  reached  the  utility 
begins  to  diminish  and  passes  through  zero  into  disutility  —  below 
the  axis  of  X.     This  curve  would  illustrate  the  direct  consumption  of 

1  See  Jevons'  Theory  of  Political  Economy  ;  Wieser's  Natural  Value; 
Marshall's  Principles,  Book  III. 


30  ELEMENTS  OF  POLITICAL  ECONOMY 

a  necessary,  e.g.  water  by  an  individuaL  The  utility  of  the  first  very 
small  portions  would  be  inappreciable  to  allay  thirst  or  support  life. 
In  this  curve  it  is  of  no  importance  how  the  utility  is  measured ;  the 
sole  object  is  to  show  how  the  utility  varies  in  response  to  successive 
units  consumed.  If  P  is  a  point  on  the  curve,  and  a  perpendicular 
PM  is  let  fall  on  OX,  then,  if  the  consumption  stops  at  M,  PM  repre- 
sents the  marginal  utility ;  where  the  curve  cuts  OX  the  marginal 
utility  is  zero,  and  beyond  this  point  it  becomes  negative,  as  in  P^My 
The  total  utility  is  represented  by  the  area  bounded  by  PM,  OM, 
and  the  curve ;  if  PM  becomes  negative,  the  aggregate  disutility  must 
be  deducted  from  the  positive  utility. 

In  Fig.  2  we  may  suppose,  as  before,  that  units  of  the  commodity 
are  measured  along  OX  and  the  corresponding  utilities  are  measured 
along  OF  by  the  prices  that  would  be  given  for  successive  portions. 
To  a  single  consumer  the  utility  may  be  supposed  to  be  measured  in 
this  way.  Any  price  higher  than  OPj  is  to  him  a  prohibitive  price, 
and  after  this  point  he  will  give  less  and  less  as  his  desire  decreases. 
AVe  may  suppose  that  he  will  cease  his  purchases  of  the  commodity 
in  question  at  the  il/th  portion,  when  the  market  price  as  determined 
by  outside  agencies  is  PM.  If  the  market  price  were  to  rise,  he  would 
buy  less,  and  if  it  fell  he  would  buy  more.  But  in  any  case  his 
marginal  purchase  would  depend  partly  on  what  he  could  do  with  the 
money  if  not  spent  on  this  thing.  The  only  advantage  of  bringing 
in  money  at  all  is  as  a  measure  that  can  be  applied  to  other  things. 
If  for  every  portion  he  is  only  obliged  to  give  PM,  the  market  price, 
while  he  would  be  willing  to  give  more  for  each  portion  up  to  the 
ilfth,  he  makes  a  gain  or  saving  on  these  portions,  and  the  aggregate 
may  be  called  consumer's  surplus.  This  would  be  represented  by  the 
area  P^CP. 

PJM^,  considered  as  a  negative  price,  would  mean  that  he  would  pay 
something  to  get  rid  of  the  thing. 

The  abstract  nature  of  the  reasoning  is  seen  when  we  consider  that 
the  continuity  of  the  curve  implies  that  both  quantities  and  prices 
move  by  infinitesimal  gradations.  An  approximation  is  made  to 
reality  by  Professor  ISIarshall  in  taking  the  consumption  of  a  large 
market  and  adopting  tlie  device,  to  begin  with,  of  thin  parallelograms 
passing  into  thick  straight  lines  {Principles,  4th  ed.,  p.  203  n.).  The 
assumptions  given  by  Professor  Marshall  must  be  carefully  noted. 


WEALTH,  UTILITY,  AND  CONSUMPTION  31 

[On  the  use  of  curves  the  student  may  consult  Wicksteed,  Alpha- 
bet of  Economic  Science;  Pantaleoni  (translated),  Pure  Economics; 
Jevons,  Theory  of  Political  Economy ;  Pareto,  Cours  cV Economic 
Folitique  (Tome  1,  lutrod.).  Most  English  readers  will  probably  find 
the  footnotes  in  Marshall's  Principles  the  most  satisfactory  introduc- 
tion, and  for  advanced  treatment  the  Appendix  of  Mathematical  Notes  ; 
Edgeworth's  Mathematical  Psychics  is  a  work  full  of  ideas.] 


CHAPTER  II 

PRODUCTION  AND  THE  AGENTS  OF  PRODUCTION 

1.  Meaning  of  Production.  —  The  definition  of  the 
terms  productive  and  unproductive,  as  applied  to  labour 
and  consumption,  was  the  occasion  of  one  of  the  most 
prolonged  controversies  in  economics,  a  part  in  which  was 
taken  by  all  the  leading  economists  from  Quesnay  and 
the  Physiocrats  to  Mill.  And  even  now  traces  of  the 
difficulties  which  were  so  hotly  discussed  are  found  to 
survive.  It  would  be  most  instructive  to  trace  the  devel- 
opment of  the  controversy,  which  is  one  of  the  best  in- 
stances of  the  necessity  of  examining  carefully  the 
meanings  of  terms  in  jDopular  use.  For  the  reasons 
already  given,  however,  the  history  of  economic  thought 
must  be  passed  over. 

Eventually,  it  became  clear,  as  was  pointed  out  by  Mill, 
that  the  terms  productive  and  unproductive  can  only 
have  a  meaning  in  reference  to  some  correlative.  Pro- 
ductive must  mean  productive  of  something.  What  is 
that  something?  The  appeal  to  popular  usage  gives  a 
vacillating  answer ;  so  also  does  the  appeal  to  the  author- 
ity of  economists.  Mill  thought  the  correlative  ought 
to  be  wealth;  but  this  answer  only  leads  up  to  all  the 
difficulties  involved  in  the  definition  of  wealth  itself. 
The  only  plan,  then,  seems  to  be  to  give  the  meaning  that 
is  best  adapted  to  the  exposition  of  economic  conceptions. 

Production,  then,  may  be  defined  as  the  production  of 

32 


PRODUCTION  AND  THE  AGENTS  OF  PRODUCTION   33 

economic  utilities ;  those,  namely,  which  in  general  are  the 
result  of  labour,  possess  exchange  value,  and  are  appro- 
priated (which  may  be  taken  as  the  definition  of  wealth 
so  far  as  that  is  possible). 

If  we  substitute  for  wealth  the  expression  economio 
utilities,  we  get  rid  of  many  vague  and  inconsistent  ideas 
popularly  associated  with  the  term. 

In  any  case  it  is  convenient  to  consider  separately 
what,  for  brevity,  may  be  called  material  and  immaterial 
production. 

Material  production  simply  puts  utilities  into  material 
things  or  adapts  them  for  consumption.  The  principal 
point  to  notice  is  that  the  corresponding  utilities  may  be 
of  the  most  varied  kinds.  Thus  transport  puts  in  the 
things  the  utility  of  being  in  the  place  where  they  are 
wanted ;  so  also  do  wholesale  and  retail  trade.  "  The 
act  of  production  is  not  complete  till  the  commodity  is 
in  the  hands  of  the  consumer." 

Similarly,  it  may  be  argued  that  the  mere  appropriation 
of  land  or  other  agents  is,  in  a  sense,  economic  production. 
History  shows  very  clearly  that  production  in  the  narrow 
sense  cannot  go  very  far  until  the  utility  of  being  appro- 
priated is  planted  in  the  things.  Thus  it  is  often  argued 
that  the  appropriation  of  land  was  essential  to  the  disap- 
pearance of  slavery,  which  is  the  most  wasteful  of  all 
forms  of  labour,  and  any  economy  of  labour  is  equivalent 
to  an  increase  of  productive  power. 

In  immaterial  production  we  have,  first,  the  utilities 
fixed  and  embodied  in  persons,  e.g.  forms  of  technical 
skill ;  secondly,  the  ideas  that  find  expression  in  art, 
science,  and  literature ;  and  lastly,  personal  services. 


34  ELEMENTS  OF  POLITICAL  ECONOMY 

Even  in  the  earliest  societies  it  is  observed  that  some 
utilities  are  only  possible  with  associations  of  individuals, 
and  the  varied  utilities  of  organisation  become  of  more 
and  more  importance  with  the  progress  of  society.  The 
building  up  of  a  system  of  banking  and  credit,  which  in 
the  last  resort  must  be  reduced  mainly  to  mental  elements, 
is  as  necessary  to  economic  production  in  general  as  the 
development  of  the  material  means  of  transport.  Simi- 
larly education,  both  of  individuals  and  of  groups,  is  as 
essential  as  the  exploitation  of  natural  resources.  The 
importance  of  the  immaterial  factors  of  production  was 
admirably  brought  out  by  List,  whose  work  on  the 
National  System  of  Political  Economy  may  be  taken  as  a 
corrective  to  the  popular  system  derived  from  Adam 
Smith,  though  his  critique  of  the  real  Adam  Smith  is 
often  unfair  or  exaggerated. 

2.  The  Agents  of  Material  Production.  —  It  is  commonly 
said  that  there  are  three  great  agents  of  production : 
namely,  land  (which  is  taken  as  representative  of  nature 
and  natural  resources  generally,  and  thus  includes  water), 
labour,  and  capital.  Some  have  denied  original  rank  to 
capital  on  the  ground  that  it  is  derived  from  the  other 
two.  But  this  objection  seems  to  carry  the  analysis  too 
far.  In  the  same  way  nature  might  be  held  to  include 
human  nature.  In  the  earliest  times  we  find  that  all  the 
essential  forms  of  capital  are  of  importance  in  production. 
In  prehistoric  times  many  of  the  most  imj)ortant  aids 
to  production  were  discovered:  e.g.  taming  of  animals, 
working  in  metals,  boat-building,  weaving,  ploughing,  etc. 
That  is  to  say,  we  find  examples  of  capital  in  the  sense  of 
wealth,  auxiliary  to   labour.      We  also  find  examples  of 


1 
I 


PRODUCTION  AND  THE  AGENTS  OF  PRODUCTION   35 

sustaining  capital  which  enabled  primitive  man  to  "  wait " 
for  distant  returns,  and  of  those  relatively  permanent 
sources  of  utility  that  modern  analysis  classes  as  consump- 
tion-capital. Through  the  whole  range  of  economic 
history  we  find  that  the  possessors  of  production-capital 
were  able  to  obtain  some  revenue  for  its  use.  In  the 
village  community  those  who  provided  the  various  parts 
of  the  great  plough  and  the  oxen  had  shares  of  the  pro- 
duce in  return,  just  as  the  driver  of  the  oxen  had  for  his 
labour. 

Some  writers  have  added  to  the  three  agents  another 
under  the  title  of  organisation.  And  unless  the  term 
capital  is  extended  so  as  to  cover  this  agent,  the  addition 
seems  to  be  justified. 

3.  Nature.  —  Nature  provides  materials  and  powers. 
In  all  forms  of  material  production  there  is  only  the 
adaptation  for  man's  use  or  consumption  of  what  is  given 
by  nature. 

The  question  was  much  discussed,  in  connection  with 
the  controversy  on  the  meaning  of  the  terms  produc- 
tive and  unproductive,  whether  nature  assists  more 
in  some  things  than  in  others ;  but  it  is  now  only  of 
historical  interest,  especially  in  connection  with  the 
development  of  the  theory  of  rent.  It  illustrates  forci- 
bly the  difficulty  of  attaining  clear  ideas  in  economics, 
and  the  necessity  of  examining  the  terms  already  familiar. 
With  us  it  is  difficult  to  enter  into  the  real  meaning  of 
these  old  controversies,  but  that  they  were  real  is  shown 
by  the  practical  proposals  to  which  they  gave  rise,  e.g.  the 
single  tax.  Here  all  that  can  be  noted  is  that  the  study 
of  the  development  and  decay  of   the  Physiocratic  doc- 


36  ELEMENTS  OF  POLITICAL  ECONOMY 

trine  and  of  its  influence  on  thought  is  well  worthy  of 
attention.  Any  short  summary,  however,  is  apt  to  be 
misleading. 

Of  the  gifts  of  nature  some  are  practically  unlimited, 
others  limited.  The  division  is  relative  to  the  numbers 
of  the  people  and  to  the  degree  of  civilisation  they  have 
attained,  both  as  regards  the  desires  for  consumption  and 
the  arts  of  production. 

In  considering  the  productive  powers  of  different 
nations,  or  of  any  one  nation  at  different  stages  of  its 
development,  the  influence  of  natural  conditions  is  always 
of  importance  in  several  ways.  This  is  a  topic  in  which 
the  details  must  be  filled  in  by  reference  to  economic 
history  and  to  commercial  geography.  Here  little  more 
than  the  basis  of  classification  can  be  given. 

The  chief  points  for  consideration  and  inquiry  may  be 
classed  under  the  followinsc  headingfs :  climatic  condi- 
tions,  including  the  mean  temperature  and  the  extremes 
and  variations  of  heat  and  cold,  force  and  direction  of  the 
winds,  healthiness  or  the  reverse.  The  great  trades  of 
the  world  depend  largely  on  these  differences,  as  also  do 
variations  in  the  efficiency  of  labour. 

The  geological  character  of  the  country  must  be  taken 
in  various  aspects,  e.g.  as  regards  coast  line  and  natural 
harbours,  mountains  and  plains,  fertility  of  the  soil,  and 
supply  of  minerals  and  raw  materials.  The  discovery  of 
gold  or  coal  may  in  a  few  3'ears  transform  a  country. 
The  Avater  supplies  are  of  importance :  as  regards  the 
means  of  communication,  the  necessity  of  elaborate 
drainage,  or  providing  motive  power. 

The   situation   of  a   country  relatively  to   others   may 


PRODUCTION  AND  Till:   AGENTS  OF   PRODUCTION      37 

under  different  conditions  be  the  dominant  factor  in  the 
supply  of  its  wealth,  —  as  is  shown  in  the  history  of  the 
transference  of  commercial  supremacy. 

When  we  put  all  these  influences  together,  we  see  that 
even  the  most  highly  civilised  nations  under  present  con- 
ditions depend  largely  on  these  natural  conditions.  To 
take  one  example,  the  present  industrial  prosperity  of 
Great  Britain  depends  to  a  great  extent  on  its  moist  and 
temperate  climate,  its  coast  line  (no  place  being  far  from 
the  sea  and  natural  harbours),  the  suitability  of  its  soil 
for  various  agricultural  products,  its  coal  and  iron,  its 
navigable    rivers,  and,  finally,  its   geographical   position. 

At  the  same  time,  natural  conditions  are  not  always  of 
predominant  importance,  as  is  shown  both  by  history  and 
by  the  present  state  of  nations. 

4.  Labour.  —  The  importance  of  labour  is  so  great  that 
it  appears  through  the  whole  range  of  economic  inquiry. 
At  this  stage  only  the  meaning  will  be  investigated. 
Labour  must  always  be  considered  from  two  points  of 
view,  which,  for  brevity,  may  be  called  subjective  and 
objective,  —  more  popularly,  from  the  point  of  view  of  the 
feeling  of  the  worker,  and  from  that  of  the  work  done. 

As  regards  the  subjective  meaning,  most  economists 
have  assumed  that  labour  is  essentially  painful,  or,  more 
generally,  involves  an  element  of  disutility.  This  view 
is  often  too  narrow,  and  the  socialists  have  done  good 
service  in  pointing  out  that,  with  a  proper  distribution 
of  work,  and  under  good  conditions,  labour  may  well  be 
directly  productive  of  enjoyment.  Most  people  in  full 
health  need  regular  exertion,  and  the  fact  that  they  earn 
money  by  it,  as  in  their  regular  work,  need  not  destroy 

434418 


38  ELEMENTS  OF  POLITICAL  ECONOMY 

the  pleasure  of  the  work  itself.  At  the  same  time,  it  may 
be  admitted  that  the  continuous  steady  work  which  is 
necessary  to  keep  the  national  production  at  full  pressure 
involves  a  strain  and  a  sacrifice  of  freedom  which  will 
only  be  submitted  to  in  the  hope  of  an  adequate  reward. 

In  a  general  view  of  economic  labour  it  is  best  to  begin 
with  a  survey  of  the  elements  involved  in  a  "quantity 
of  labour"  from  the  subjective  side.  The  expression  is 
to  be  taken  in  the  sense  given  to  it  by  Adam  Smith  in 
a  celebrated  passage. 

Under  this  term  are  included  all  those  influences  which 
affect  the  minds  and  the  lives  of  the  workers  in  doing 
the  work.     Such  are  :  — 

The  time  involved.  At  first,  time  may  be  taken  as 
uniform,  e.g.  five  times  as  much  labour  in  five  hours  as 
in  one,  but  after  a  point  there  is  a  rapid  increase  in  the 
quantity  of  labour,  e.g.  the  twentieth  hour  of  the  man 
in  the  signal  box. 

The  next  point  is  the  intensity  of  the  labour.  "  There 
may  be  more  labour  in  an  hour's  hard  work  than  in  two 
hours'  easy  business." 

Logically  we  ought  to  include  in  the  real  cost  of  the 
labour  (which  is  another  name  for  this  subjective  quan- 
tity), not  only  the  prime  cost,  but  also  the  supplementary 
cost  in  the  way  of  education  or  preparation.  "There 
may  be  more  labour  in  an  hour's  application  to  a  trade 
which  it  cost  ten  years  to  learn,  than  in  a  month's  in- 
dustry  at  an  ordinary  and  obvious  employment."  We 
must  also  take  account  of  the  environment  of  the  worker : 
the  physical  and  sanitary,  as  well  as  the  mental  and  moral 
conditions  under  which  the  labour  is  performed. 


PRODUCTION  AND  THE  AGENTS  OF  PRODUCTION  39 

Finally,  it  may  be  said  that  the  unit  of  time  ought  to 
be  the  whole  life.  Statistics  of  the  different  employments 
show  that  the  conditions  of  work  have  an  eifect  on  the 
duration  of  the  power  to  labour,  and  anything  that 
shortens  life  must  be  held  to  intensify  the  labour,  though 
it  may  not  be  perceived  at  the  time. 

When  we  regard  labour  from  the  objective  point  of  view 
we  are  mainly  concerned  with  the  causes  affecting  the 
efficiency  of  labour.  These  may  be  divided  into  two 
groups:  those  affecting  the  individual,  and  those  affect- 
ing combinations  of  labour.  At  this  point  only  the 
former  need  be  considered. 

Such  are  qualities  of  race  and  the  influences  of  heredity, 
of  great  importance,  but  liable  to  be  exaggerated.  The 
supply  of  food,  or  more  generally  of  necessaries,  is  some- 
times an  essential  factor,  as  in  the  "economy  of  high 
wages."  On  this  point,  the  change  of  opinion  is  remark- 
able ;  it  used  to  be  accepted  doctrine,  that,  the  less  peo- 
ple had,  so  much  the  harder  they  would  be  compelled 
to  work,  e.g.  that  they  would  work  harder  in  dear  years. 
Lately  the  exaggeration  has  been  toward  the  other 
side  in  many  cases.  To  revive  an  old  term,  all  consump- 
tion is  not  productive,  or,  in  other  words,  does  not  add 
to  efficiency.  The  full  treatment  of  this  topic  would 
involve  an  elaborate  inductive  inquiry. 

The  environment  affects,  not  only  the  feelings  of  the 
worker,  but  also  his  efficiency  —  and  in  many  ways. 

The  intellectual  ability,  natural  and  acquired,  involves, 
for  adequate  treatment,  an  examination  of  systems  of 
education.  The  opinion  may  be  hazarded  that,  at  present, 
too   much    stress   is   laid   on   direct    technical    training. 


40  ELEMENTS  OF  POLITICAL  ECONOMY 

Similarly,    the    moral    capacities    and    activities    operate 
on  the  effectiveness  of   the  worker  in  a  great  variety  of 
ways.     As  an  illustration  on  a  large  scale,  we  may  take 
the  gradual  transition  from  slavery  through    all   degrees 
of  serfdom  up  to  free   labour.     There    is   no  doubt   that 
one  of  the  principal  agencies  in  this  transformation  was 
the  increasing  efficiency  of   labour  with    increasing   free- 
dom.     In   conclusion,  it   must   be   laid   down   with   the 
greatest  emphasis,  that  labour,  as  an  agent  of  production, 
must  be  held   to   include  the    very    highest   professional 
skill   of   all   kinds,   as    well   as    the    labour   of   unskilled 
workers   and   artisans ;    we    must   include,    not   only   the 
labour   of    those    engaged   in   business    in    the   ordinary 
sense  of  the  term,  but  that  of  those  employed  in  educa- 
tion,  in   the    fine    arts,    in   literature,  in  science,   in  the 
administration  of   justice,    and   in   government  in  all   its 
branches ;  and  we  must  include  also,  not  only  the  labour 
that  results  in   a   permanent   form,  but  also    that  which 
renders  services  that  perish  in  the  act. 

Since  the  time  of  Adam  Smith  (who  took  a  very  wide 
view)  there  has  been  a  tendency  to  narrow  unduly  the 
interpretation  of  the  term  labour^  and  in  that  way  to  take 
a  limited  view  of  the  range  of  economic  inquiry.  At  pres- 
ent there  are  problems  connected  with  the  expenses  of 
education,  and  the  expenses  of  defence,  which,  to  say  the 
least,  are  as  important  as  the  actions  of  trusts  and  trade 
unions ;  and  one  essential  part  of  these  problems  is  the 
training  of  the  individuals.  Even  under  modern  con- 
ditions, with  our  large-scale  methods,  in  the  last  resort 
the  economic  unit  is  not  a  corporation  or  an  army,  but 
a  man. 


PRODUCTION  AND   THE   AGENTS   OF    PRODUCTION     41 

5.  Capital.  —  Capital,  like  labour,  is  dominant  in  every 
department  and  has  also  an  endless  variety  of  forms.  On 
the  meaning  and  the  functions  of  capital,  volumes  have 
been  written,  and,  to  judge  by  the  economic  journals,  vol- 
umes are  still  being  written  and  no  doubt  will  continue 
to  be  written.  Properly  viewed,  this  is  not  a  matter  for 
regret,  as  it  simply  indicates  that  capital  is  one  of  the 
most  far-reaching  conceptions,  and  that  with  changing  con- 
ditions its  content  is  subject  to  change  (as  soon  as  we 
leave  generalities).  The  present  section  must  be  regarded 
as  an  introduction  only,  to  the  study  of  these  generalities 
and  this  brief  treatment  must  of  necessity  be  selective 
and  dogmatic.  In  its  origins  (or  one  of  them)  capital 
means  the  principal  in  a  loan  of  money  (eapitalis  pars 
dehiti)  as  distinct  from  the  interest.  Gradually,  though 
many  chapters  of  economic  history  are  required  to  trace  the 
details  of  the  process,  it  became  clear  that  not  only  money, 
but  anything  that  yields  interest,  ought  to  be  placed 
under  capital.  Money  itself  only  yielded  interest  by 
being  employed,  and  the  interest  was  earned  by  other 
things. 

Thus  the  conclusion  is  reached  that  it  is  of  the  essence 
of  capital  to  yield  a  revenue.  This  is  the  root  idea  with 
Adam  Smith  and  still  may  be  considered  as  prominent 
in  popular  discourse. 

This  idea  of  yielding  revenue  is  generally  the  most 
important  from  the  point  of  view  of  the  individual.  A 
person  will  class  as  capital  the  loan  advanced  to  an  un- 
productive landlord  or  an  extravagant  government,  so 
long  as  his  fund  is  secure.  If  the  revenue  is  forthcoming, 
the  capital  from  his  point  of  view  is  always  there ;  and  if 


42  ELEMENTS  OF  POLITICAL  ECONOMY 

the  revenue  ceases  with  no  chance  of  renewal,  the  corre- 
sponding capital  disappears  as  a  bad  debt. 

But  especially  when  we  look  at  capital  from  the  national 
standpoint,  we  have  to  consider  how  the  revenue  is  ob- 
tained. A  nation  considered  as  self-dependent  cannot 
make  a  revenue  unless  its  resources  are  employed  pro- 
ductively ;  a  nation  of  money-lenders  would  soon  realise 
the  barrenness  of  money.  Seeing,  then,  that  the  revenue 
of  capital  must  be  produced,  some  writers  have  found  the 
essential  character  of  capital  is  its  productiveness.  And 
if  a  nation  begins  to  consume  its  capital  without  replacing 
it  by  production,  it  must  sink  into  poverty.  As  its  capital 
disappears  so  also  will  its  income.  This  is  self-evident, 
if  capital  is  one  of  the  fundamental  agents  of  production, 
and  in  one  sense  at  least  it  must  be  so  regarded.  It 
seems  best,  however,  to  emphasise  the  idea  of  revenue 
from  the  individual  standpoint.  But  in  some  respects 
this  idea  also  needs  modification  or  supplement.  If,  to 
begin  with  an  example,  a  dwelling-house  is  to  rank  as 
capital  when  let  to  a  tenant  for  a  rent,  then  it  must  also 
so  rank  when  occupied  by  the  owner  (and  by  the  severe 
logic  of  the  British  income-tax  gatherers,  even  when  not 
occupied).  This  leads  up  to  what  may  be  called  con- 
sumption-c?ii)ital  in  the  specific  sense  of  the  term.  This 
form  of  capital  (or  capital  from  this  point  of  view)  con- 
sists of  things  which  yield  utility,  not  in  the  shape  of 
money  revenue,  but  in  some  form  of  direct  enjoyment 
or  satisfaction.  Take,  for  example,  the  movables  in  the 
houses  of  individuals,  and  the  forms  of  public  property, 
such  as  picture  galleries,  museums,  etc.  This  class  of 
wealth,  by  whatever  name  it  is  called,  is  of  great  impor- 


PRODUCTION   AND  THE  AGENTS  OF  PRODUCTION     43 

tance.  Sir  R.  Giffen,  in  his  calculations  of  the  capital  of 
the  United  Kingdom,  reckoned  the  movables  in  the 
houses  as  of  about  half  the  value  of  the  houses. 

Thus,  on  this  line  of  treatment,  there  are  three  great 
species  of  capital ;  namely,  production-cn^itol,  revenue- 
capital,  and  consumptio7i-c?iT^ital. 

If  now  it  is  asked :  Is  there  any  root  idea  common  to 
these  three  species  ?  it  may  be  said  to  be  found  in  the  sat- 
isfaction of  future  needs,  as  contrasted  with  present  and 
immediate  consumption.  Even  in  the  last  species  named, 
i.e.  consumption-capital,  things  are  not  included  unless 
they  are  designed  for  future  as  well  as  immediate  use. 
Thus,  in  this  view,  the  relative  permanence  of  capital  is 
contrasted  with  the  relatively  immediate  consumption  of 
income.  "  Prospectiveness,"  not  productiveness,  is  in  this 
way  the  most  general  characteristic  of  capital,  if  only 
one  term  is  to  be  employed. 

There  can  be  no  question  that  one  of  the  best  signs  of 
national  progress  is  the  growth  of  this  power  of  looking 
to  the  future,  and  either  directly  by  the  creation  of  con- 
sumption-capital, or  indirectly  by  that  of  means  of  pro- 
duction, giving  effect  to  this  idea  of  "prospectiveness." 

For  some  purposes,  however,  we  have  to  specialise,  and 
besides  the  species  of  capital  already  considered  there  are 
others. 

Recently  some  economists  have  insisted  on  a  general 
view  of  capital  that  at  first  sight  seems  directly  opposed  to 
that  just  presented.  It  is  said  that  the  distinction  between 
capital  and  income  is  simply  a  difference  in  the  modes  of 
measuring  wealth,  whether  of  individuals  or  of  nations. 
The  capital  of  an  individual  or  a  community  is  an  amount 


44  ELEMENTS  OF   POLITICAL  ECONOMY 

of  wealth  in  existence  at  a  particular  moment,  while  the 
income  is  wealth  obtained  during  a  certain  period.  To 
the  present  writer  this  view  of  capital  seems  rather  adapted 
to  accounting  than  to  economics.  The  mere  valuation  of 
a  nation's  wealth  at  any  particular  moment,  if  it  could  be 
effected,  would  be  of  no  interest  except  as  the  basis  of 
comparison  with  a  similar  estimate  at  some  other  date ; 
and  the  comparison  for  economic  purposes  would  be  of  no 
use  without  analysis,  and  such  analysis  would  bring  out 
the  ideas  already  examined. 

When  joro(Z^(cf wH-capital  is  examined,  several  species  are 
discovered.  Circulating  capital  "fulfils  the  whole  of  its 
functions  in  a  single  use,  e.g.  raw  materials  or  necessaries 
for  labour  "  (Mill)  ;  fixed  capital  can  be  used  in  produc- 
tion more  than  once  without  losing  its  form.  Adam 
Smith  defined  circulating  capital  as  that  which  yields  a 
revenue  by  circulating  or  changing  hands.  Perhaps  the 
most  interesting  point  in  Adam  Smith's  treatment  is  that, 
in  spite  of  his  realism  and  popular  style,  he  is  led  by  the 
stress  of  his  argument  to  use  the  term  immediate  as  possi- 
bly covering  generations  and  to  rank  buildings  as  capital 
only  when  they  yield  a  revenue,  not  only  to  the  owner,  but 
to  the  occupier,  —  another  striking  instance  of  the  difficulty 
of  adapting  popular  ideas  and  language  to  scientific  pur- 
poses. 

Mill's  four  propositions  on  capital  (in  his  sense  of  pro- 
duction-capital) are  of  interest  in  the  development  of 
economic  thought.  With  the  exception  of  the  unfortu- 
nate fourth,  —  demand  for  commodities  is  not  demand  for 
labour,  —  they  are  taken  from  Adam  Smith.  So  far  as 
true  they  simply  assert   that  capital  (in  Mill's  sense)  is 


PRODUCTION  AND  THE  AGENTS  OF  PRODUCTION     45 

a  necessary  agent  of  production  and  that  it  is  being  con- 
tinually destroyed  (Mill  says  consumed)  and  reproduced. 
These  propositions  are  of  interest  in  connection  with  the 
wages  fund  theory,  and  of  use  in  disposing  of  certain 
crude  fallacies  on  the  nature  of  saving  and  the  powers  of 
governments. 

6.  The  Connection  between  Consumption  and  Production. 
—  At  this  point  attention  may  be  called  to  the  old  dis- 
tinction between  productive  and  unproductive  consump- 
tion. Only  that  consumption  was  classed  as  productive 
which  was  necessary  to  the  efficiency  of  labour  and  keep- 
ing up  the  supply  of  labour  for  productive  purposes. 
Thus  not  all  the  consumption  even  of  the  most  poorly 
paid  labourers  was  productive.  Carried  to  this  extreme, 
the  distinction  proved  to  be  of  little  value,  and  the  point 
involved  is  better  treated  under  the  causes  affecting  the 
efficiency  of  labour. 

Generally,  it  may  be  said  that  consumption  means  using 
things,  and  production  means  adapting  them  for  use ;  and 
logically  the  two  ideas  are  better  kept  distinct.^ 

Note  on  the  Curve  representing  the  Quantity  of  Labour 
AND  the  Utility  of  the  Product  ^ 

Along  OX  measure  units  of  time  devoted  to  labour.  At  first  there 
may  be  some  disutility  OL;  this  gradually  decreases  and  passes 
through  the  zero  of  indifference  R  to  positive  utility  corresponding 
to  the  moderate  pleasure  of  active  work  RSRy    After  a  point  T  on  axis 

1  See  Higgs,  Physiocrats ;  Mill,  FrincipJes,  Book  I;  Marshall,  Princi- 
ples, Book  II ;  Boehm-Bawerk,  Capital  and  Interest  and  Positive  Theory 
of  Capital;  Cannan,  Theories  of  Production  and  Distribution ;  Smith, 
Wealth  of  Nations,  Book  IV,  Chap.  IX. 

2  See  Jevons,  Theory,  p.  IfiS. 


46 


ELEMENTS   OF   POLITICAL  ECONOMY 


the  utility  diminishes  and  passes  through  zero  7?^  to  disutility,  which 
rapidly  increases ;  this  corresponds  to  the  excessive  fatigue  of  over- 
work. 


QP  is  the  utility  curve  which  represents  the  utility  obtained  from 
the  product  of  the  successive  units  of  time  devoted  to  labour.  The 
first  portions  may  be  supposed  to  provide  for  necessaries,  and  the 
utility  is  indefinitely  great,  but  after  a  point  the  utility  diminishes. 
It  will  pay  the  worker  to  continue  up  to  the  point  at  which  the 
utility  PM  obtained  in  return  for  the  last  unit  of  labour  time  is  just 
equal  to  the  disutility  P^M  involved.  L^p  to  that  point  there  is  a  gain 
of  utility,  but  after  this  point  there  is  increasing  disutility.  It  will 
be  noted  that  the  curves  are  only  intended  to  illustrate  the  general 
relations  between  labour  (subjective)  and  the  utility  of  the  result. 


CHAPTER  III 

DIVISION   OF   LABOUR 

1.  Meaning  of  Division  of  Labour.  —  Like  other  economic 
terms  of  popular  derivation,  division  of  labour  embraces 
several  distinct  but  allied  conceptions.  Briefly  stated,  it 
includes  the  division  or  specialisation  of  employments 
within  a  nation,  and  of  processes  within  an  employment. 
This  division  again  involves  combination  and  organisation, 
including  exchange.  The  expression  division  of  labour 
was  used  by  Adam  Smith  in  the  widest  sense,  although 
to  begin  with  he  takes  the  simple  case  of  pin-making,  and 
in  consequence  is  often  supposed  to  use  the  term  only  in 
the  most  special  and  narrow  sense. 

As  showing  the  importance  of  both  aspects,  it  may 
be  recalled  that  ]\Iill  entitles  the  corresponding  chapter 
combination  of  lahour. 

In  any  case  it  is  found  that  division  of  labour  involves 
a  corresponding  division  and  combination  of  capital  — 
both  material  and  immaterial. 

The  separation  of  employments  is  of  very  early  origin, 
and  is  well  illustrated  by  the  industrial  offices  of  the 
village  communities.  But  in  these  self-sufficing  com- 
munities only  a  very  limited  division  of  employments  was 
possible.  To  get  the  benefits  of  this  separation  to  its  full 
extent,  a  large  nation  and  even  the  whole  commercial 
world  is  required.      Thus  it  is  sometimes  said  that  free 

47 


48  ELEMENTS  OF  POLITICAL  ECONOMY 

trade  is  an  example  of  the  advantages  of  division  of 
labour :  the  productive  powers  of  each  country  are  devoted 
to  what  it  can  best  produce. 

Division  of  labour  in  the  narrowest  sense  refers  to  the 
separation  of  processes  within  any  particular  industry  or 
employment. 

2.  Advantages  of  Division  of  Labour.  —  The  advantages 
commonly  enumerated,  following  Adam  Smith,  are :  The 
increased  dexterity  of  the  workers  through  constant  prac- 
tice of  the  same  thing.  This  may  be  illustrated  from 
primitive  times  in  the  skill  shown  in  making  the  serrated 
edges  of  the  flint  arrows.  But  the  full  power  is  only  seen 
when  taken  with  the  appropriate  auxiliary  capital.  In  all 
the  higher  forms  of  labour  such  specialisation  seems  neces- 
sary to  success.  This  advantage  apj^ears  most  in  improve- 
ments of  quality  rather  than  in  economy  of  productive 
power.  In  both  respects  labour  has  to  compete  with 
machinery.  On  the  whole,  however,  contrary  to  popular 
opinion,  the  development  of  mechanical  appliances  since 
the  industrial  revolution  has  increased  the  skill  of  the 
individual  workers,  or,  what  is  the  same  thing,  this 
increased  division  of  labour  demands  greater  skill. 

Under  a  system  of  minute  division  of  labour  the  various 
workers  can  be  classified  according  to  their  several  capaci- 
ties, and  full  employment  can  be  given  to  the  auxiliary 
capital.  This  can  be  illustrated  indefinitely  by  reference 
to  the  employment  of  men,  women,  and  children,  in  each 
case  with  great  varieties  of  skill. 

There  is  an  economy  of  time ;  e.g.  no  waste  in  passing 
from  one  form  of  work  to  another  and  in  starting  different 
operations,  in  early  times  a  point  of   much  importance. 


DIVISION  OF   LABOUR  49 

Under  present  conditions  the  time  element  is  chiefly  of 
importance  in  cases  in  which  the  work  could  not  be  done 
in  the  time  required  without  division  of  labour. 

The  continuous  specialisation  promotes  the  discovery  of 
inventions.  No  doubt,  as  is  shown  by  history,  the  original 
creative  idea  may  often  be  due  to  outsiders ;  but  the  full 
development  for  practical  purposes  is  only  possible  by 
little  increments  of  invention.  In  material  production  it 
seems  that  progress  is  more  continuous  than  in  other 
departments  of  human  activity,  e.g.  literature  and 
especially  poetry.  It  is  rarely  tliat  improved  processes 
of  production  are  lost  and  the  beginnings  of  most  of 
the  industrial  arts  can  be  carried  back  to  prehistoric 
times :  the  dug-out  canoe  is  the  forerunner  of  the  steel 
iron-clad. 

In  any  of  its  varied  meanings  division  of  labour  in- 
volves a  corresponding  specialisation  of  auxiliary  capital. 
And  for  this  purpose  capital  must  be  taken  in  the  most 
extensive  sense.  Thus  we  must  include  the  mental 
capital  of  the  nation  and  of  the  world  as  exemplified  in 
the  various  practical  sciences,  such  as  chemistry,  engi- 
neering, etc. 

The  combination  of  labour  is  of  two  kinds  :  simple  and 
complex.  In  simple  combination  the  advantage  lies  in 
numbers  doing  the  same  thing  at  the  same  time  ;  e.g.  in 
the  harvesting  of  primitive  communities  or  the  naviga- 
tion of  a  great  ship  in  modern  times.  The  latter  example 
also  serves  to  illustrate  complex  cooperation,  which  is  still 
better  shown  in  the  building  of  the  ship.  Here  the  idea 
is  that  numbers  of  different  operations  are  combined  to 
produce  a  complex  result.      In  some  cases  we  have  a  com- 

K 


60  ELEMENTS  OF  POLITICAL  ECONOxMY 

bination  of  labour  extending  over  generations,  as  in  the 
construction  of  vast  systems  of  drainage. 

The  advantages  of  division  of  labour  have,  up  to  the 
present,  been  realised  to  a  greater  extent  in  material  than 
in  immaterial  production ;  and  the  progress  of  the  specu- 
lative, as  distinct  from  the  practical,  sciences  would  be 
greatly  promoted  by  more  systematic  organisation. 

3.  Division  of  Labor  is  limited  by  the  Extent  of  the 
Market.  —  Division  of  labour  involves,  as  a  rule,  produc- 
tion on  a  large  scale,  and  this  again  depends  on  the  extent 
of  the  market.  Thus  an  increase  of  foreign  trade  by 
rendering  possible  production  on  a  larger  scale  may 
cheapen  the  commodity  in  the  home  market.  At  present, 
aided  by  protective  tariffs  and  trusts,  this  advantage  is 
often  transferred  to  the  foreigner.  The  course  of  English 
economic  history  shows  very  clearly  the  influence  of  the 
growth  of  foreign  trade  on  the  development  of  industry, 
e.g.  at  first  in  woollen  manufactures  and  later  in  cotton. 

Theoretically  it  might  be  advantageous  to  give  bounties 
on  production  if  the  economies  of  division  of  labour  could 
be  introduced  to  such  an  extent  that  they  would  more 
than  compensate  for  the  payment  of  the  tax. 

In  immaterial  production  also  the  division  of  labour  is 
limited  by  the  extent  of  the  market ;  e.g.  in  law,  medicine, 
education,  and  the  various  professions  the  greater  the 
demand  (or  the  market  for  the  corresponding  services) 
so  much  greater  is  the  specialisation.  A  good  example  is 
found  in  banking.  It  is  thus  clear  that  division  of  labour 
is  closely  connected  with  exchange,  and  this  forcibly 
illustrates  the  interconnection  of  the  great  departments 
in  economics.     Exchange,  again,  involves  the  protection  of 


DIVISION  OF  LABOUR  51 

property  and  the  enforcement  of  contracts  and  generally 
security.  In  this  way  division  of  labour  is  also  connected 
with  distribution  and  governmental  control.  Finally,  it 
may  be  said  that  economic  progress  is  to  a  great  extent 
dependent  on  the  development  of  division  of  labour,  and 
there  was  good  reason  why  Adam  Smith  should  make 
this  principle  the  starting-point  of  his  inquiry. 

4.  The  Localisation  of  Industry.  —  The  localisation  of 
industry  depends  partly  on  the  specialisation  due  to 
division  of  labour.  It  is  one  of  the  most  interesting 
problems  in  economic  history  to  trace  the  reasons  why 
certain  industries  have  become  settled  in  certain  localities. 
To  begin  with,  there  may  be  some  natural  advantage,  e.g. 
proximity  to  the  source  of  materials  or  powers  provided 
by  nature ;  political  or  social  influences  may  create  a  local 
demand;  and  in  certain  notable  cases  in  English  history 
there  have  been  settlements  of  foreign  artisans,  sometimes 
attracted  to  this  country  by  the  hope  of  gain,  sometimes 
driven  from  their  own  by  political  or  religious  persecu- 
tion. Again,  protection  may  stimulate  production  in  cer- 
tain places,  and  in  the  mediaeval  period  the  towns  adopted 
a  protectionist  policy  against  one  another. 

At  this  stage,  however,  it  is  more  important  to  observe 
that,  if  for  any  reason  an  industry  has  once  been  estab- 
lished in  any  locality,  there  are  strong  reasons  why  it 
should  continue  to  flourish  there  and  not  be  transported 
to  other  places.  Both  labour  and  capital  become  special- 
ised and  there  is  a  continuity  of  improvements ;  industries 
grow  up  that  are  subsidiary  to  the  main  industry ;  the 
means  of  communication  are  adapted  both  to  the  acquisi- 
tion of  raw  materials  and  to  the  marketing  of  the  products ; 


52  ELEMENTS  OF   POLITICAL  ECONOMY 

in  short,  there  are  all  the  internal  and  external  economies 
of  which  Professor  Marshall  has  given  so  full  and  lucid  an 
account. 

Too  much  stress,  however,  ought  not  to  be  laid  on  these 
initial  advantages,  and  in  general  any  attempt  at  monopoly- 
has  been  defeated.  The  restrictive  policy  of  the  old  gilds 
and  corporations  was  a  failure.  Just  at  the  very  time 
when,  owing  to  a  variety  of  causes,  the  economic  system 
of  the  Middle  Ages  was  giving  place  to  the  modern,  and 
England  was  entering  on  a  period  of  prosperity,  we  find 
constant  complaints  of  the  decay  of  the  towns  and  of  their 
staple  industries.  The  chief  reason  was  that  the  industries 
were  migrating  to  the  county  districts,  where  they  were 
free  from  these  monopolistic  restraints.  In  the  same 
way,  in  modern  times,  protection  has  often  failed  to 
neutralise  foreign  competition. 

The  principles  and  the  progress  of  localisation  are  also 
exemplified  in  the  case  of  immaterial  production.  Uni- 
versities and  law  courts  remain  settled  in  certain  places, 
and  banks  and  credit  institutions  once  established  may 
retain  their  position,  though  it  would  seem  that  other 
places  have  greater  advantages.  Here  also,  however,  the 
initial  advantages  cannot  be  maintained  unless  there  is 
continuous  adaptation  to  the  progress  of  society. 

5.  Disadvantages  of  Division  of  Labour.  —  When  the  dis- 
advantages of  division  of  labour  are  spoken  of,  it  is  not 
meant  that  they  are  such  as  are  necessarily  inherent  in  the 
system,  but  only  such  as  experience  has  shown  are  likely 
to  occur  and  ought  to  be  guarded  against.  Such  disad- 
vantages arise  from  the  excessive  specialisation  of  the 
individual,  from  the  concentration  of  labour  in  large  facto- 


DIVISION   OF   LABOUR  63 

ries  and  in  cities,  and  from  the  delicacy  of  the  industrial 
organisation.  In  a  general  survey  these  disadvantages 
may  be  classed  in  three  groups ;  namely,  physical,  mental, 
and  social.  It  was  observed  by  an  Italian  writer,  early  in 
the  eighteenth  century,  that  particular  physical  diseases 
are  associated  with  certain  employments.  Under  modern 
conditions  this  liability  might  be  indefinitely  illustrated, 
and  a  large  part  of  the  factory  legislation  is  intended  to 
provide  a  remedy  for  these  abuses.  In  fact,  it  may  be  said 
that  there  is  hardly  any  great  industry  which  is  not  sub- 
jected by  law  to  certain  compulsory  sanitary  regulations. 
It  is,  however,  a  curious  fact  that  the  workers  themselves 
often  place  obstacles  in  the  way  of  efficient  inspection  and 
of  the  discovery  of  the  infringement  of  the  acts.  In  the 
matter  of  the  relative  healthiness  of  employments  the  only 
safe  rule  is  to  appeal  to  experience.  Thus  coal-mining, 
apart  from  the  liability  to  accidents,  is  a  healthy  employ- 
ment, whilst  very  often  out-of-door  occupations,  owing  to 
special  circumstances,  are  relatively  unhealthy. 

More  stress  has  been  laid  on  the  mental  evils  that  spring 
from  excessive  specialisation  than  seems  to  be  warranted 
by  facts.  Here  the  principal  evil  alleged  is  the  monotony 
of  the  work,  which  is  supposed  to  have  a  cramping  effect  on 
the  mind.  This  has  been  forcibly  brought  out  by  Adam 
Smith.  In  an  eloquent  passage  he  contrasts  the  driving 
of  horses  with  the  driving  of  machinery.  So  much  was 
he  impressed  by  the  evil  of  monotony  that  it  was  one  of 
the  chief  grounds  why  he  thought  the  education  of  the 
common  people  demanded  the  special  attention  of  the 
state.  In  modern  times  the  evil  has  been  denounced  with 
still  greater  eloquence  by  Ruskin,  though  the  eloquence 


54  ELEMENTS   OF   POLITICAL   ECONOMY 

is  marred  in  his  case  by  ignorance  of  economic  facts  and 
principles.  Perhaps  the  difficulty  is  most  forcibly  put  by 
the  French  writer  who  asks  what  can  be  expected  of  the 
mind  of  a  man  whose  activities  are  constantly  devoted  to 
making  the  eighteenth  part  of  a  pin. 

In  this  argument,  however,  it  is  assumed  too  readily 
that  the  minds  and  characters  of  men  are  moulded  entirely 
by  their  occupations.  But  it  should  be  remembered  that 
the  very  monotony  of  the  work  saves  the  energies  of  the 
individual,  and  in  his  leisure  he  can  do  something  better 
than  merely  satisfy  his  physical  wants.  Thus  the  opera- 
tives of  Lancashire  are  devoted  to  music.  Many  cases  are 
recorded  in  which  a  factory  hand  has  come  to  the  front 
through  educating  himself  in  his  spare  time ;  but  spare 
time  without  spare  energy  is  worthless.  It  is  remarkable 
also,  in  the  highest  branches  of  labour,  how  often  the 
workers  find  relaxation  in  different  pursuits.  At  present 
it  may  be  said  that  the  sports  and  the  habits  of  the  masses 
of  the  people  have  more  to  do  with  mental  narrowness 
than  any  monotony  connected  with  their  work. 

The  monotony  itself  is  also  liable  to  be  exaggerated  The 
more  monotonous  the  work,  so  much  the  more  probable  is 
it  that  there  will  be  a  substitution  of  machinery  for  labour. 

Again,  as  regards  the  evils  attributed  to  tlie  cities 
compared  with  the  country  they  are  liable  to  be  exag- 
gerated. In  the  past  freedom  began  with  the  towns,  and 
in  one  of  his  best  chapters  Adam  Smith  has  described 
how  the  commerce  of  the  towns  led  to  the  improvement 
of  the  country.  In  modern  times  it  is  too  readily  assumed 
tliat  the  immigration  from  the  country  to  the  towns  is  in 
every  case  due  to  a  want  of  correct  judgment  on  the  part 


DIVISION  OF  LABOUR  65 

of  the  immigrants.  But  the  cities  offer  their  gains  as  well 
as  their  losses,  and  class  for  class  the  workers  in  the  town 
will  compare  favourably  with  those  in  the  country.  When 
we  look  at  the  broad  facts  of  progress,  we  find  that,  on  the 
whole,  the  modern  system,  with  its  complicated  machinery 
and  its  use  of  scientific  methods,  involves  a  much  higher 
development  of  the  race  than  was  possible  under  simpler 
conditions.  In  the  Middle  Ages  there  were  artists  and 
men  of  genius,  and  some  of  the  most  wonderful  personali- 
ties the  world  has  ever  seen.  But  the  mediaeval  serfs  who 
formed  the  bulk  of  the  population  were  under  less  favour- 
able conditions  for  development  than  the  lowest  labourers 
of  the  present.  But  for  the  progress  of  cities  and  manufac- 
tures England  would  have  remained  as  backward  as  Russia. 

At  present,  also,  it  is  in  the  employments  in  which  there 
is  least  division  of  labour  and  the  greatest  survival  of 
older  and  simpler  methods  that  there  is  as  a  rule  most 
misery,  e.g.  the  workers  on  canal  barges,  the  nailers  in 
Staffordshire,  and  generally  those  engaged  in  what  are 
called  the  domestic  industries. 

The  social  disadvantages  that  arise  from  the  delicacy  of 
the  industrial  organisation,  the  interdependence  of  indus- 
tries, the  oscillations  between  periods  of  inflation  and 
depression,  excessive  competition,  and  the  sudden  action 
of  the  "  law  of  substitution,"  are  to  be  ascribed,  not  only 
to  division  of  labour,  but  to  other  forces  and  conditions  that 
fall  to  be  considered  in  other  departments  of  economics.-^ 

1  On  special  topics  in  this  chapter,  for  fuller  treatment,  see  Nicholson, 
Effects  of  Machinery  on  Wages;  Hobson,  Evolution  of  Capitalism; 
Cunningham,  Alien  Immigrants  into  England;  Marshall,  Principles  of 
Economics^  Book  IV,  Chaps.  VIII-X. 


CHAPTER  IV 

PRODUCTION   ON   A   LARGE   AND   SMALL   SCALE 

1.    Production  on  a  Large  Scale  in  Manufactures.  —  The 

tendency  to  production  on  a  large  scale  consequent  on  the 
extension  of  division  of  labour  and  the  associated  auxiliary- 
capital  (material  and  immaterial)  is  best  treated  by  taking 
different  typical  cases  separately — and  first,  manufactures. 
Here  the  concentration  of  labour  and  capital  and  the  amal- 
gamation of  small  industries  has  been  most  noticeable  since 
the  industrial  revolution,  and  quite  recently  a  further 
development  has  taken  place  by  the  creation  of  trusts. 
The  process  of  concentration  can  only  be  explained  ade- 
quately by  an  inductive  inquiry,  and  here  it  is  only  possi- 
ble to  give  an  outline  of  the  lines  to  be  followed. 

The  effi.ciency  of  the  productive  agents  is  greater  in 
many  ways  in  large  production,  e.g.  there  can  be  a  better 
classification  of  labour  according  to  its  capacity ;  applied 
machinery  can  be  so  adjusted  as  to  give  full  employment 
to  the  motive  power ;  improvements  can  be  more  readily 
adopted ;  small  inventions  can  be  encouraged ;  expert  skill 
can  be  called  in  to  a  greater  extent  ;  better  agents  can  be 
employed  in  the  selection  of  materials  and  of  processes; 
and  the  control  of  departments  and  subdepartments  can 
be  put  in  the  hands  of  competent  managers  while  the 
energies  of  the  head  of  the  firm  are  devoted  to  general 
superintendence  and  organisation. 

66 


PRODUCTION  OX  A  LARGE  AND  SMALL  SCALE  57 

A  variety  of  internal  and  external  economies  (Marshall) 
can  be  adopted  in  large  scale  production,  the  details  of 
which  vary  in  different  cases  and  can  only  be  enumerated 
in  special  works. 

2.  Other  Cases.  —  The  tendency  to  large  production  is 
also  shown  in  a  pronounced  manner  in  the  means  of  com- 
munication and  transport.  The  history  of  railways,  of 
shipping,  and  of  telegraphs  is  the  history  of  amalgamations. 

Similarly  the  distribution  by  the  wholesale  and  retail 
merchants,  which  logically  is  part  of  production,  has  fol- 
lowed the  same  lines. 

Mines  are  worked  by  larger  capitals,  so  are  gas  and 
water  companies. 

The  same  tendency  also  appears  in  various  forms  of 
immaterial  production.  Thus  joint-stock  banks  have 
swallowed  up  the  private  banks  to  a  great  extent,  and 
the  larger  insurance  companies  have  displaced  the  smaller. 

In  fact,  when  we  take  a  rapid  survey  of  the  history  of 
the  nineteenth  century,  the  tendency  to  large  scale  produc- 
tion becomes  so  prominent  that  it  seems  to  give  a  basis 
to  a  universal  law  or  generalisation. 

Of  late,  in  particular,  the  spread  of  the  trust  system  has 
induced  the  fear  that  in  the  course  of  time  there  will  be 
no  small  industries  left,  and  that  the  industries  of  all  the 
great  nations  will  be  concentrated  in  the  hands  of  a  num- 
ber of  gigantic  trusts.  Thus  it  is  important  to  consider 
the  counteracting  causes. 

3.  Counteracting  Causes.  —  The  localisation  of  indus- 
tries renders  it  possible  in  some  cases  for  a  number  of  rela- 
tively small  businesses,  that  specialise  in  certain  branches, 
to  succeed  as  well  as  if  the  processes  were  carried  on  by 


58  ELEMENTS   OF   POLITICAL   ECONOMY 

the  same  firm.  The  loss  incurred  in  small  economies  may 
be  made  good  by  the  greater  specialised  skill  on  the  whole. 

Again,  to  all  large  industries  there  are  subsidiary  indus- 
tries which  provide  certain  things  only  required  to  a  small 
extent  or  occasionally.  Thus  there  may  be  a  variety  of 
trades  in  the  hands  of  small  masters. 

In  the  course  of  progress  new  wants  arise  that  are  met 
by  new  luxuries.  Very  often  these  are  of  such  a  kind 
and  of  such  variety  as  to  be  best  produced  on  a  small 
scale,  e.g.  photographs,  scientific  instruments,  etc. 

The  force  to  be  attributed  to  these  and  other  counter- 
acting causes  can  only  be  properly  estimated  by  an  induc- 
tive and  historical  inquiry  beyond  the  limits  of  these 
pages.  But  as  the  point  is  at  present  of  much  interest, 
a  few  significant  figures  may  be  quoted  from  a  recent 
investigation  by  Leroy  Beaulieu.  He  shows  that  in  the 
British  textile  industries  there  were  in  1896  as  many  as 
9891  factories  belonging  to  7900  firms  compared  with 
5961  factories  in  1870.  In  France  the  patentes  or  taxes 
on  businesses  have  grown  steadily  from  1,163,255  in  1830 
to  1,752,315  in  1900,  and  the  population  is  far  from  having 
grown  in  the  same  proportion.  This  growth  of  small 
industries  is  explained  by  a  variety  of  causes :  industrial 
operations  formerly  done  at  home  are  now  specialised, 
and  give  rise  to  small  industries,  e.g.  laundry  work  and 
baking ;  brokers  and  middlemen,  though  displaced  in  some 
directions,  have  been  more  than  proportionately  increased 
in  others ;  and  many  of  the  recent  inventions  have  fa- 
voured the  growth  of  medium  businesses  —  such  as 
those  connected  with  electricity  and  the  manufacture  of 
bicycles,  and  even  of  motors.    Wealth  and  luxury,  being 


PRODUCTION  ON  A  LARGE  AND  SMALL  SCALE   59 

more  general,  have  called  into  existence  numerous  small 
industries  for  the  production  of  articles  de  luxe.  "There 
has  been  quite  a  swarm  of  new  small  and  medium  indus- 
tries " — is  the  general  conclusion. 

Much  attention  has  been  recently  directed  to  the  fact 
that  in  the  United  Kingdom  there  are  registered  every 
year  a  large  number  of  joint-stock  companies  with  rela- 
tively small  capitals.  This  is  the  more  noticeable  be- 
cause it  is  generally  supposed  that  the  chief  inducement 
to  joint-stock  enterprise  is  the  magnitude  of  the  capital 
required. 

4.  Joint-stock  Companies.  —  The  economic  history  of 
companies  is  of  the  highest  interest,  and  for  the  origins 
we  must  go  back  to  the  mediaeval  period.  Joint-stock 
companies  proper  were  preceded  by  various  forms  of 
organisation,  notably  regulated  companies,  but  the  joint- 
stock  principle  proper  was  well  established  in  the  seven- 
teenth century. 

The  speculative  manias  that  arose  in  France  in  connec- 
tion with  the  schemes  of  John  Law,  and  in  England  with 
the  South  Sea  Bubble,  and  the  little  success  that  at- 
tended the  foreign  trade  companies,  gave  rise  to  a  general 
distrust  of  the  principle,  as  is  shown  by  the  increasing 
stringency  of  legislation.  Adam  Smith  himself  was  so 
much  impressed  by  the  facts  of  history,  that  he  main- 
tained no  company  could  hope  to  succeed  unless  it  had  a 
monopoly,  or  was  such  that  its  business  was  of  a  purely 
routine  character.  In  support  of  this  narrow  view,  he 
emphasised  the  want  of  self-interest  on  the  part  of  the 
managers  and  the  tendency  to  the  neglect  of  small  sav- 
ings.    These  difficulties,  however,  have  been  obviated  to 


60  ELEMENTS  OF  POLITICAL  ECONOMY 

a  great  extent  by  the  encouragement  of  professional 
skill,  by  gradual  promotion  to  valuable  appointments, 
and  by  giving  a  certain  interest  in  the  business  to  the 
employees.  Profit-sharing,  however,  has  not  succeeded 
to  the  extent  that  might  have  been  expected. 

The  advantages  of  joint-stock  companies  are:  they 
can  undertake  operations  too  large  for  private  enter- 
prises, e.g.  railroads;  in  some  cases  they  can  offer  the 
security  of  a  larger  reserve  fund,  as  in  banks,  in  which, 
even  if  the  liability  is  limited,  there  is  generally  a  large 
uncalled  capital ;  in  companies  generally  there  is  greater 
publicity  as  regards  the  accounts,  and  thus  so  far  greater 
security  in  credit  transactions ;  they  serve  for  the  invest- 
ment of  small  savings,  and  thus  provide  also  for  the 
distribution  of  risks;  they  can  afford  to  work  for  lower 
gross  profit  as  the  shareholders  only  expect  a  fair  return 
in  the  shape  of  interest,  and  not  profits  of  management ; 
conversely,  where  the  risks  are  great,  but  the  chances  of 
gains  are  also  great,  a  company  may  be  floated  where 
private  enterprise  would  be  repelled.  The  adoption  of 
the  principle  of  limited  liability  has  given  a  great  stimu- 
lus to  companies. 

The  resultant  effect  of  these  and  of  other  influences 
of  a  more  special  character  in  different  circumstances, 
has  been  that  companies  have  displaced  to  a  great  extent 
private  enterprise  in  many  important  industries.  As 
already  observed,  however,  many  of  these  companies  are 
relatively  small,  in  fact,  in  some  cases,  so  small  that  it 
may  be  supposed  that  the  principal  inducement  has  been 
the  limited  liability.  From  a  recent  return  (1902),  to 
the   income   tax  assessments  in  the   United   Kingdom   it 


PRODUCTION  ON  A  LARGE  AND  SMALL  SCALE   61 

appears  that,  of  over  25,000  public  companies,  less  than 
6000  earn  more  than  X5000  per  annum,  whilst  more  than 
half  of  the  total  number  earn  less  than  XIOOO  per 
annum. 1 

1  See  Marshall,  Pririciples,  Book  IV,  Chaps.  XI  and  XII,  Book  VI, 
Chap.  VII;  Macrosty,  Trusts  and  the  State;  S.  and  B.  Webb,  Industrial 
Democracy  ;  Hobson,  Evolution  of  Modern  Capitalism. 


CHAPTER  V 

PRODUCTION   ON   A  LARGE   AND   SMALL   SCALE  Df 
AGRICULTURE 

1.  Complexity  of  the  Question.  —  In  comparing  the 
relative  advantages  of  large  and  small  farming,  there  are 
several  distinct  questions  involved.  Besides  the  question 
of  production  pure  and  simple,  there  are  various  social 
and  moral  factors,  which  it  is  difficult  to  keep  separate 
in  any  particular  case. 

If  we  confine  the  attention  only  to  production,  the  ques- 
tion becomes :  under  which  system  will  the  efficiency  of 
labour  and  capital,  when  applied  to  land,  be  the  greater? 

This  implies  that  equal  amounts  of  the  productive 
agents  are  compared.  One  favourite  argument,  however, 
in  support  of  the  small  system  is  the  greater  ardour  of 
work,  the  long  hours,  the  devotion  to  the  land,  etc ;  and 
on  analysis  this  surely  implies  that  more  labour  is  applied, 
and  so  far  there  should  be  a  greater  return.  And  then 
the  further  inquiry  should  be  made :  what  might  be  done 
with  this  labour  if  devoted  to  other  pursuits  ?  Thus,  in 
the  Highlands  of  Scotland,  an  amount  of  labour  is  often 
spent  on  the  small  crofts  which  would  give  a  far  greater 
return  if  employed  in  fishing,  or  in  work  on  the  larger 
farms.  More  generally,  the  growth  of  towns  and  the 
advance  of  civilisation  has  been  only  possible  by  the  trans- 
fer of  labour  from  the  land. 

62 


PRODUCTION  IN  AGRICULTURE  63 

Again,  when  dealing  as  far  as  possible  with  production 
merely,  there  is  still  the  difficulty  of  the  measure  to  be 
adopted. 

We  can  only  compare  different  kinds  of  produce  by 
estimating  the  money  value  of  the  returns.  And  then 
from  the  national  point  of  view  the  question  arises 
whether  we  ought  to  take  simply  the  net  return,  or  the 
gross  yield.  In  practice  the  net  return  would  be  the 
rent.  It  is  clear,  however,  that  the  maximum  rent  in 
some  cases  might  be  yielded  with  an  insignificant  amount 
of  gross  produce,  as  when  a  large  tract  of  country,  for- 
merly cultivated,  is  thrown  under  deer.  The  rental 
may  rise ;  indeed,  that  will  be  the  motive  for  the  change, 
but  to  the  nation  at  large  the  value  of  the  product  is 
far  less. 

To  a  less  extent  the  substitution  of  sheep  farms  for 
arable  has  similar  effects,  as  in  the  enclosures  in  the  fif- 
teenth and  sixteenth  centuries. 

Again,  in  making  the  comparison,  it  is  not  just  to 
place  on  one  side  peasant  properties,  which  are  supposed 
to  be  free  from  mortgages  (their  greatest  danger)  and  on 
the  other  tenancies  with  imperfect  leases.  The  much- 
quoted  aphorisms  of  Arthur  Young  are  only  half-truths : 
"The  magic  of  property  turns  sands  into  gold."  "Give 
a  man  the  secure  possession  of  a  bleak  rock,  and 
he  will  turn  it  into  a  garden ;  give  him  a  nine  years' 
lease  of  a  garden,  and  he  will  turn  it  into  a  desert." 
As  will  appear  later  on,  equitable  leases  may  be  pref- 
erable to  occupying  ownership.  Generally,  it  may  be 
said  that  the  effects  of  different  systems  of  land  tenure 
have   been   the   subject   of  a    vast   amount   of   economic 


CHAPTER  V 

PRODUCTION   ON   A  LARGE   AND   SMALL  SCALE   IN 
AGRICULTURE 

1.  Complexity  of  the  Question.  —  lu  comparing  the 
relative  advantages  of  large  and  small  farming,  there  are 
several  distinct  questions  involved.  Besides  the  question 
of  production  pure  and  simple,  there  are  various  social 
and  moral  factors,  which  it  is  difficult  to  keep  separate 
in  any  particular  case. 

If  we  confine  the  attention  only  to  production,  the  ques- 
tion becomes :  under  which  system  will  the  efficiency  of 
labour  and  capital,  when  applied  to  land,  be  the  greater? 

This  implies  that  equal  amounts  of  the  productive 
agents  are  compared.  One  favourite  argument,  however, 
in  support  of  the  small  system  is  the  greater  ardour  of 
work,  the  long  hours,  the  devotion  to  the  land,  etc ;  and 
on  analysis  this  surely  implies  that  more  labour  is  applied, 
and  so  far  there  should  be  a  greater  return.  And  then 
the  further  inquiry  should  be  made :  what  might  be  done 
with  this  labour  if  devoted  to  other  pursuits  ?  Thus,  in 
the  Highlands  of  Scotland,  an  amount  of  labour  is  often 
spent  on  the  small  crofts  which  would  give  a  far  greater 
return  if  employed  in  fishing,  or  in  work  on  the  larger 
farms.  More  generally,  tlie  growth  of  towns  and  the 
advance  of  civilisation  has  been  only  possible  by  the  trans- 
fer of  labour  from  the  land. 

62 


PRODUCTION  IN   AGRICULTURE  63 

Again,  when  dealing  as  far  as  possible  with  production 
merely,  there  is  still  the  difficulty  of  the  measure  to  be 
adopted. 

We  can  only  compare  different  kinds  of  produce  by 
estimating  the  money  value  of  the  returns.  And  then 
from  the  national  point  of  view  the  question  arises 
whether  we  ought  to  take  simply  the  net  return,  or  the 
gross  yield.  In  practice  the  net  return  would  be  the 
rent.  It  is  clear,  however,  that  the  maximum  rent  in 
some  cases  might  be  yielded  with  an  insignificant  amount 
of  gross  produce,  as  when  a  large  tract  of  country,  for- 
merly cultivated,  is  thrown  under  deer.  The  rental 
may  rise ;  indeed,  that  will  be  the  motive  for  the  change, 
but  to  the  nation  at  large  the  value  of  the  product  is 
far  less. 

To  a  less  extent  the  substitution  of  sheep  farms  for 
arable  has  similar  effects,  as  in  the  enclosures  in  the  fif- 
teenth and  sixteenth  centuries. 

Again,  in  making  the  comparison,  it  is  not  just  to 
place  on  one  side  peasant  properties,  which  are  supposed 
to  be  free  from  mortgages  (their  greatest  danger)  and  on 
the  other  tenancies  with  imperfect  leases.  The  much- 
quoted  aphorisms  of  Arthur  Young  are  only  half-truths : 
"The  magic  of  property  turns  sands  into  gold."  "Give 
a  man  the  secure  possession  of  a  bleak  rock,  and 
he  will  turn  it  into  a  garden ;  give  him  a  nine  years' 
lease  of  a  garden,  and  he  will  turn  it  into  a  desert." 
As  will  appear  later  on,  equitable  leases  may  be  pref- 
erable to  occupying  ownership.  Generally,  it  may  be 
said  that  the  effects  of  different  systems  of  land  tenure 
have   been   the   subject   of   a   vast   amount   of   economic 


64  ELEMENTS  OF   POLITICAL  ECONOMY 

research,  and   no   simple    or   summary   answer   on   their 
relative  merits  is  possible. 

2.  Large  and  Small  Farming  Compared.  —  If  we  take 
farming  in  the  common  sense,  of  arable  and  stock  mixed 
in  varying  proportions,  we  may  conveniently  compare  the 
advantages  under  three  headings  —  according  to  the  three 
great  agents  of  production. 

As  regards  land^  a  large  surface  can  be  better  split  up 
into  the  necessary  enclosure,  it  can  be  better  provided  with 
drains  and  roads,  better  adajDted  for  the  different  kinds  of 
produce  required,  and  many  of  the  operations  can  be 
more  economically  performed  on  relatively  large  fields. 

As  regards  capital,  the  large  farms  usually  have  an 
advantage  in  buildings,  implements,  machinery,  kinds  of 
stock,  insurance  against  risk,  etc. 

As  regards  labour  on  the  large  farms,  there  can  be  a 
better  adjustment  according  to  capacity,  a  greater  com- 
mand of  scientific  skill,  etc.  On  the  other  hand,  we  have 
the  greater  interest  in  the  work  of  the  small  holder  who 
works  for  himself. 

It  was  maintained  by  Mill  that  in  farming  not  much 
division  of  labour  was  required,  and  that  in  the  operations 
where  combination  of  labour  was  needed  cooperation 
might  be  adopted.  For  a  time,  both  in  France  and  the 
United  Kingdom,  this  remained  a  counsel  of  perfection; 
but  it  is  noteworthy  that  recently  the  cooperative  princi- 
ple has  been  applied  with  much  success  in  agriculture, 
notably  in  Ireland  and  also  in  France. 

The  ardour  of  work,  which  used  to  be  so  much  praised 
as  the  great  virtue  of  the  peasant  proprietor,  has  of  late 
years  been  painted   in  more   sombre   colours  —  the  expe- 


PRODUCTION  IN  AGRICULTURE  65 

rience  of  France  shows  that  the  toil  may  be  carried  to  the 
extent  of  the  utter  degradation  of  life.  In  the  United 
States,  however,  three-fourths  of  the  farms  are  cultivated 
by  the  owners ;  but  as  a  rule  they  are  of  a  class  superior 
to  the  peasants  of  Europe,  and  do  not  suffer  from  the 
same  drawbacks. 

Comparisons  are  sometimes  made  of  the  average  yield 
per  acre  of  different  countries  with  the  implication  that 
the  highest  yield  has  the  best  system.  The  question, 
however,  does  not  admit  of  such  an  easy  test,  because  the 
intensity  of  cultivation  varies  with  the  stage  of  develop- 
ment, the  demand,  etc.  (cf.  the  law  of  diminishing  return 
to  land  —  Chap.  VI  below). 

3.  Historical  and  Social  Influences.  —  As  a  matter  of  fact 
the  actual  distribution  of  the  land  of  a  country  in  large 
and  small  holdings  depends  on  a  variety  of  causes  apart 
from  the  mere  efficiency  of  the  productive  agents  in  the 
two  schemes. 

Among  such  influences  to  be  considered  are  the  con- 
ditions affecting  the  capital  available  for  agriculture. 
Large  farms  involve  as  a  rule  large  capitals,  which  may 
not  be  forthcoming,  e.g.  in  new  countries.  In  former  times 
the  want  of  large  capitals  was  made  good  on  the  great 
manorial  estates  by  forced  labour  and  the  forced  loan  of 
the  oxen  and  ploughs  of  the  serfs. 

Conversely,  economic  conditions  generally  might  be 
favourable  to  small  farms,  but  there  are  not  small  capitals. 

The  rate  of  profit  is  often  the  determining  factor. 
With  high  farming  profits  the  large  system  is  encour- 
aged, while  with  falling  profits  the  small  system  tends 
to  take  its  place.     Thus  after  the  Black  Death  (1349- 


66  ELEMENTS   OF   POLITICAL  ECONOMY 

1350)  the  rise  in  the  cost  of  labour  and  materials 
dissipated  the  profits  of  farming  by  the  lords  of  manors 
on  a  large  scale.  Through  the  land  and  stock  lease 
(Rogers)  and  other  modes  of  tenancy,  the  lands  were 
let  to  small  holders,  many  of  whom  eventually  bought 
their  holdings  and  became  yeomen. 

The  small  holder  looks  rather  to  a  good  return  to  his 
own  labour  and  that  of  his  family  than  to  a  profit  in  the 
strict  sense  on  his  capital. 

In  Scotland  at  present  the  conditions  are  favourable 
to  the  creation  of  small  farms,  but  the  difficulty  is  to 
find  small  tenants  with  sufficient  capital. 

Next  to  the  influence  of  the  conditions  of  capital  we 
may  notice  the  effects  of  the  kind  of  produce  for  which 
the  country  or  district  may  be  adapted.  Some  of  the 
products  of  the  soil  require  minute  care  and  supervision, 
others  are  naturally  adapted  to  production  on  a  large 
scale.     Vines  and  wool  may  be  taken  as  typical. 

Closely  connected  with  the  kind  of  produce  are  the 
climatic  conditions  and  the  fertility  of  the  soil.  Thus 
in  France  itself,  which  is  generally  referred  to  as  the 
country  par  excellence  of  the  small  system,  nearly  half 
of  the  total  area  is  in  farms  of  over  one  hundred  acres, 
and  only  about  a  quarter  of  the  total  area  is  in  holdings 
of  twenty-five  acres  and  under. 

The  demand,  the  proximity  of  towns,  facilities  of  trans- 
port and  marketing,  are  sometimes  the  most  important 
factors  to  be  considered. 

The  influence  of  the  land  laws  is  liable  to  be  ex- 
aggerated, and  seems  to  have  more  effect  on  the  amount 
of  the  produce  than  on  the  size  of  the  holdings. 


PRODUCTION   IN   AGRICULTURE  67 

Under  modern  conditions  the  relative  rates  of  wages 
to  be  obtained  in  the  towns  and  in  the  country  have 
great  influence.  The  small  farmer,  like  the  small  shop- 
keeper, is  a  wage-earner,  and  does  not  subsist  on  his 
profit  mainly. 

From  these  considerations  it  is  clear  that  we  cannot 
argue  from  the  success  of  one  system  in  a  certain  time 
and  place  that  it  ought  to  succeed  in  times  and  places 
in  which  the  essential  conditions  may  be  different  —  e.g. 
the  Channel  Islands  and  the  Hebrides  —  Westmoreland  in 
the  eighteenth  century  and  the  twentieth,  etc.^ 

1  On  the  subject  of  this  chapter  there  is  a  vast  literature.  For  the 
general  principles  Passy's  Systemes  de  Culture  is  still  the  best ;  Lady 
Verney's  Peasant  Properties  may  be  used  as  a  corrective  to  Mill,  and  to 
such  works  as  Kay's  Free  Trade  in  Land.  See  also  Marshall,  Princi- 
ples, Book  VI,  Chap.  X ;  Nicholson,  Tenant's  Gain  not  Landlord's  Loss. 


70  ELEMENTS  OF  POLITICAL  ECONOMY 

increase,  and  any  increase  of  the  produce  must  be  at  an 
increasing  cost,  which  is  another  way  of  saying  that  the 
return  per  unit  diminishes. 

This  leads  to  the  second  form  of  the  law  in  the  case  of 
land;  namely,  beyond  a  certain  point  every  additional 
quality  of  land  taken  into  cultivation  gives  a  diminishing 
return  per  unit  of  productive  power. 

We  may  suppose  that,  to  begin  with,  having  regard  to 
the  state  of  the  arts  of  agriculture,  only  the  best  quality 
of  land  is  cultivated.  In  the  shifting  agriculture  of  primi- 
tive tribes  they  change  their  fields  per  annos  and  always 
superest  ager^  and  whatever  else  these  disputed  words  may 
mean,  they  describe  a  state  of  things  to  which  this  second 
form  of  the  law  does  not  apply.  There  is  plenty  of  good 
land. 

But  in  long-settled  old  countries  that  are  self-support- 
ing, after  a  certain  density  of  population  has  been  reached, 
the  food  supplies  can  only  be  increased  either  by  the  in- 
tensive application  of  capital  to  the  land  already  in  use, 
in  which  case  the  law  in  its  first  form  comes  into  play,  or 
resort  must  be  had  to  inferior  land,  when  the  second  or 
extensive  form  of  the  law  operates. 

As  regards  this  second  statement,  it  seems  best  to  refer 
to  different  qualities  of  land,  the  quantities  or  areas  being 
adjusted  to  the  capital  expended. 

In  the  case  of  the  produce  being  consumed  at  a  distance 
from  the  place  of  origin,  distance  may  be  held  to  have  the 
same  effects  as  inferior  quality.  The  cost  of  transport 
acts  both  on  the  materials  and  on  the  product.  The  prin- 
ciple may  be  applied  that  the  act  of  production  is  not  com- 
plete till  the  commodity  is  in  the  hands  of  the  consumer. 


LAWS  OF  DIMINISHING  AND  INCREASING  RETURN     71 

In  general  the  laAv  will  operate  simultaneously  in  the 
intensive  and  the  extensive  forms ;  that  is  to  say,  the  old 
settlements  will  be  more  highly  farmed,  and  at  the  same 
time  less  fertile  and  more  distant  or  less  advantageously 
situated  lands  will  be  taken  into  cultivation. 

The  most  economical  application  of  the  productive 
powers  of  the  nation  will  be  made  when  the  marginal 
return  in  every  case  is  just  equal.  (The  analogy  of  the 
equality  of  marginal  utility  in  the  expenditure  of  a  sum 
of  money  on  different  things  may  be  noted.) 

3.  Counteracting  Causes. — So  long  as  the  conditions 
laid  down  remain  the  same,  the  law  in  this  combined 
form  is  like  a  law  of  nature  in  the  physical  sense  (Mill). 
But  the  main  interest  of  its  application  is  in  regard  to 
the  food  supplies  of  any  nation.  Thus  the  question 
arises:  As  population  increases,  will  the  additional 
food  always  involve  an  increasing  cost?  And  it  is  in 
the  answer  to  this  question  that  the  counteracting  causes 
are  of  such  importance.  As  soon  as  we  introduce  the 
element  of  time,  we  have  the  probability  in  progressive 
nations  of  essential  changes  in  the  conditions.  And  the 
longer  the  period  taken,  the  greater  the  chance  of  change. 

Amongst  the  counteracting  causes  may  be  noticed : 
improvements  in  agricultural  methods,  e.g.  rotation  of 
crops,  use  of  machinery,  and  scientific  processes  ;  improve- 
ments in  the  means  of  communication,  which  Adam  Smith 
called  the  greatest  of  all  agricultural  improvements, — 
the  introduction  of  new  forms  of  produce,  e.g.  the  potato 
and  roots  for  feeding  cattle.  This  topic  might  be  indefi- 
nitely illustrated  both  from  earlier  and  from  modern 
times.      Quite   recently   the   cross    fertilisation   of  grain 


72  ELEMENTS  OF   POLITICAL   ECONOMY 

seems  to  have  enormously  increased  the  return  to  the 
capital  expended. 

It  may  be  noted,  also,  that  land  which  is  inferior  under 
certain  conditions  may  become  the  best  land  under  a 
different  regime.  Thus  in  new  countries,  even  in  modern 
times,  the  lands  are  first  cultivated  that  are  most  acces- 
sible, and  do  not  require  much  expenditure  in  clearing, 
just  as  for  the  same  reasons  the  primitive  tribes  culti- 
vated the  hill-tops,  which  were  near  their  rude  forts 
and  villages,  and  were  also  less  covered  with  luxuriant 
vegetation.  As  Mill  observes,  there  is  scarcely  any  im- 
provement in  the  arts  of  production  generally  which 
may  not  serve  to  counteract  this  law.  Thus,  improve- 
ments in  machinery,  and  in  transport,  or  in  the  manu- 
facture of  food  products,  or  in  the  avoidance  or  the 
utilisation  of  waste  —  may  add  to  the  productive  power 
of  the  society  as  regards  its  food  supplies.  Thus,  the  law 
does  not  state,  that  in  the  course  of  time,  with  the  in- 
crease of  population,  the  absolute  marginal  cost  will 
increase,  or  that  the  last  "  dose  "  of  labour  (and  capital) 
applied,  will  yield  less  and  less  as  the  years  pass.  Even 
when  we  take  an  isolated  country,  or  one  dependent  on 
its  own  food  supplies,  this  cannot  be  predicated.  And 
still  less  when  we  take  account  of  foreign  supplies. 

Thus  the  conclusion  is  reached  that  the  law  is  only 
true  under  statical  conditions,  and  that  it  cannot  be 
formulated  under  dynamical  or  changing  conditions, 
except  under  hypotheses  which  really  reduce  this  case 
to  the  former.  There  are  other  theoretical  difficulties 
that  can  only  be  indicated.  Except  in  the  simplest 
hypothetical  cases,  it  will  generally  be  necessary  to  meas- 


LAWS  OF  DIMIXISHING  AXD  INCREASING  RETURN      73 

ure  both  the  applications  of  the  doses  of  capital,  and  also 
the  returns  in  terms  of  money.  Otherwise  it  is  not  pos- 
sible to  take  account  of  different  modes  of  cultivating 
and  of  different  kinds  of  produce. 

But  this  again  introduces  the  difficulty,  that  the  price 
of  the  produce  must  always  depend  as  much  on  demand 
as  supply,  and  the  influence  of  increasing  population  can 
only  operate  through  demand.  The  growth  of  wealth 
may  lead  to  food  products  being  given  to  animals  not 
themselves  designed  for  meat. 

4.  Other  Applications  of  the  Law.  —  The  law  may  be 
applied,  mutatis  mutandis^  to  fisheries,  mines,  and  other 
products  from  land  in  the  extended  sense.  A  similar  law 
may  also  be  framed  as  regards  building  sites.  Suppose 
that  the  main  business  of  a  town  is  carried  on  at  the 
centre,  or  that  for  any  reason  the  centre  is  preferable 
for  residence.  Then,  as  the  margin  of  building  extends, 
there  will  be  diminishing  convenience.  At  the  same 
time,  the  buildings  near  the  centre  will  be  raised  in 
height,  and  we  may  suppose  the  top  story  will  cost  more, 
and  also  that  it  will  be  less  convenient. 

Again,  we  may  trace  the  growth  of  towns  and  cities, 
and  discover  counteracting  causes  similar  to  those  in 
agriculture.  Under  different  conditions,  the  attractive- 
ness of  the  centre  may  be  less,  the  means  of  transit  to 
the  outskirts,  or  again  to  the  top  stories,  may  be  improved, 
and  so  on ;  so  that  we  cannot  say  that  with  the  increase 
of  population,  it  will  cost  more  and  more  to  provide  the 
marginal  accommodation  including  under  that  term  the 
access  to  employment.  Some  of  these  points  will  again 
come  up  for  discussion   under   the    theory   of    rent,  and 


74  ELEMENTS  OF  POLITICAL   ECONOMY 

also  in  the  treatment  of  economic  progress.  In  con- 
clusion, it  may  be  pointed  out,  that  this  law  of  diminish- 
ing return  is  deserving  of  close  study,  not  only  on  account 
of  its  importance  as  applied  to  other  parts  of  economic 
theory,  e.g.  rent,  population,  value,  etc.,  but  also  as  an 
example  of  method.  In  the  abstract  form,  it  is  the  best 
illustration  of  the  working  of  marginal  increments,  whilst 
on  the  inductive  and  historical  side,  it  gives  rise  to  many 
fruitful  lines  of  inquiry. 

5.  The  Law  of  Increasing  Return.  — The  law  of  increas- 
ing return  in  its  formal  statement  is  the  exact  analogue 
of  the  law  of  diminishing  return  :  under  certain  conditions 
every  additional  unit  of  productive  power  gives  a  more 
than  proportionate  return. 

As  thus  stated,  the  law  may  be  observed  under  certain 
conditions  even  in  agriculture.  In  fact,  it  is  only  after 
a  certain  point  is  reached  that  diminishing  return  sets 
in,  and  up  to  that  point  there  may  be  increasing  return. 
This  is  constantly  observed  in  new  countries.  And  there 
the  law  may  be  said  to  apply  to  the  whole  productive 
powers  of  the  community;  that  is  to  say,  in  new  and 
undeveloped  countries  every  increase  of  capital  and  of 
labour  may  give  a  more  than  proportionate  return.  This 
is  the  theoretical  justification  of  large  borrowings  for 
productive  purposes  and  of  bounties  direct  or  indirect  on 
immigration. 

In  a  sense  the  law  may  be  said  to  express  in  a  sum- 
mary form  the  advantages  of  division  of  labour  and 
of  production  on  a  large  scale  which  render  possible 
the  adoption  of  various  internal  and  external  economies 
(Marshall). 


LAWS  OF  DIMINISHING  AND  INCREASING  RETURN      75 

It  is  a  matter  of  common  observation  that  with  many 
things  an  increasing  quantity  can  be  produced  at  a  les- 
sened cost  per  unit  on  the  average,  e.g.  books,  etc.  Again, 
in  most  manufactures,  up  to  a  certain  point,  every  increase 
of  the  scale  of  production  seems  in  general  to  give  increas- 
ing return.  English  writers  under  the  influence  of  the 
industrial  conditions  that  prevailed  after  the  industrial 
revolution  were  inclined  to  suppose  that  in  the  course 
of  progress  diminishing  return  always  came  into  play  in 
agriculture  and  increasing  return  in  manufactures. 

But  once  we  leave  static  conditions,  no  such  tendency 
can  be  proved  to  prevail.  It  has  already  been  shown  that 
in  the  case  of  land  diminishing  return  may  be  counter- 
acted in  a  variety  of  ways,  and  as  regards  manufactures 
generally  the  most  potent  causes  of  improved  production 
are  to  be  found,  not  in  the  economies  introduced  by 
extending  the  scale  of  the  business,  but  in  all  kinds  of 
scientific  discoveries.  But  from  this  point  of  view  it 
is  possible  that  over  any  long  period  there  may  be  greater 
discoveries  in  the  production  of  raw  materials  of  all  kinds, 
including  food  supplies,  than  in  the  corresponding  manu- 
factures. 

It  may  also  be  pointed  out  that  as  regards  particular 
businesses  there  must  be  a  limit  to  the  advantage  to 
be  gained  by  an  increase  in  size,  or  in  each  industry 
there  would  soon  be  only  one  firm  left.  A  reference  to 
facts  of  modern  industry  show  that  the  same  result  may 
be  achieved  in  very  different  ways.  The  law  of  increasing 
return  does  not  state  that  every  increase  of  the  size  of 
manufacturing  concerns  is  associated  with  an  increase 
of  productive  power. 


76  ELEMENTS  OF  POLITICAL  ECONOMY 

Again,  if  we  refer  to  the  localisation  of  industries,  no 
doubt  the  growth  of  towns  and  cities  is  often  accompanied 
by  an  increase  of  facilities  of  transport  and  of  various 
other  economies  of  production  in  the  extended  sense ; 
but  it  cannot  be  said  that  there  is  any  necessary  con- 
nection between  the  growth  of  cities  and  the  growth 
of  their  manufacturing  industries.  It  is  quite  possible 
that  with  the  great  improvements  in  transport  we  are 
on  the  eve  of  centrifugal  distribution  of  industrial 
power. 

These  questions  will  call  for  further  consideration  in 
considering  economic  progress.  (See  below.  Book  IV.) 
One  of  the  principal  applications  of  these  laws  of  increas- 
ing and  diminishing  return  is  in  the  theory  of  normal 
value,  especially  in  dealing  with  the  effect  of  an  increase 
of  demand  for  certain  things.  In  this  connection  the  law 
of  constant  return  is  also  of  importance  ;  so  far  as  produc- 
tion is  concerned  it  may  be  said  to  indicate  the  balancing 
of  diminishing  and  increasing  return.  As  a  rule  in  every 
case  we  have  a  conflict  of  opposing  tendencies,  and  accord- 
ing to  the  result  we  have  constant,  diminishing,  or  in- 
creasing return.  And  as  regards  the  same  commodity 
at  different  times  under  different  conditions,  we  find 
that  it  may  be  produced  according  to  each  of  these  laws 
in  turn  —  that  is  to  say,  it  is  not  the  kind  of  commodity, 
but  the  conditions  of  production  that  determine  which 
law  operates.  1 

1  See  Marshall,  Principles,  Book  IV,  Chaps.  Ill  and  XIII ;  Sidgwick, 
Principles,  Book  I,  Chap.  VI ;  Iladley,  Economics,  Chap.  VI ;  Cannan, 
Production  and  Distribution. 


LAWS  OF  DIMINISHING  AND  INCREASING  RETURN       77 


Illustrative  Curves 


O  M 


Along  OX  measure  units  of  productive  power  and  along  OY 
the  corresponding  products  to  the  successive  portions.  Fig.  1  repre- 
sents diminishing  return ;  Fig.  2  increasing,  and  Fig.  3  constant 
return.  For  different  purposes  the  units  of  power  and  the  returns 
may  be  measured  in  different  ways.  Later,  in  the  theory  of  rent, it  is 
convenient  to  separate  produce  and  money  rents.  In  general  it  is 
simplest  to  consider  money  expended  and  the  money  return.  In  the 
figures  as  given  no  more  is  intended  than  an  illustration  of  the 
variations  in  the  returns.  The  mode  of  measurement  is  a  matter  of 
indifference. 


CHAPTER  VII 

THE  PEINCIPLE   OF   POPULATION 

1.  The  Theory  of  Malthus.  —  The  limits  of  this  work  do 
not  admit  of  any  history  of  the  development  of  theories. 
If  an  exception  were  to  be  made,  some  account  might  well 
be  given  of  the  Essay  on  the  Principle  of  Population,  by 
Malthus,  and  its  influence  on  subsequent  thought.  Here  it 
must  suffice  simply  to  warn  the  student  that  his  work  has 
been  much  misunderstood,  and  that  J.  S.  Mill  is  to  blame 
for  much  of  the  misunderstanding.  Mill's  morbid  dread  of 
the  increase  of  population  was  pushed  to  such  an  extreme 
that  it  vitiated  his  whole  treatment  of  the  wages  question. 
It  led  him  also  to  disfigure  his  work  with  irrelevant  reflec- 
tions on  the  immorality  of  large  families,  and  generally 
on  what  may  be  called  the  immorality  of  imprudence  ;  and 
for  these  extreme  opinions  there  is  no  support  in  the 
Essay  of  Malthus  or  in  the  history  of  peoples,  or  it  may 
be  said  in  the  common-sense  of  mankind.  Indeed,  Mill's 
morbid  dread  of  the  increase  of  population  is  one  of  the 
curiosities  of  economic  literature,  and  is  especially  cu- 
rious under  present  conditions.  In  France,  of  recent  years, 
there  seems  to  have  been  not  only  a  falling  off  in  the 
rate  of  increase,  but  actually  a  fall  in  population  itself; 
and  Leroy  Beaulieu  has  maintained  that  the  natural 
tendency  of  the  democratic  principle  is  to  lead  to  a  check 

78 


THE   PRINCIPLE   OF  POPULATION  79 

in  the  growth  of  population.  Recent  publications  have 
also  shown  that  the  opinions  of  Mill,  at  the  time,  called 
forth  an  answer  which  showed  that,  even  in  savage  com- 
munities, in  spite  of  the  abundance  of  the  means  of  sub- 
sistence, the  population  might  dwindle. 

The  connection  of  the  work  of  Malthus  with  that  of 
Darwin  has  also  been  misrepresented,  and  a  critical  study- 
shows  that  the  leading  ideas  of  the  Darwinian  theory  are 
not  applicable  to  human  beings,  at  any  rate  in  historical 
times.  The  growth  of  population  depends  on  a  multitude 
of  social  and  moral  factors,  as  well  as  on  physical  condi- 
tions. One  of  these  causes  —  or  it  would  be  better  to  say 
one  group  of  causes  —  is  found  in  the  demand  for  labour, 
an  aspect  of  the  question  to  which  much  attention  is 
being  given  at  present  (though  it  also  was  emphasised  by 
Adam  Smith).  Another  cause,  it  is  true,  is  always  found 
in  the  conditions  affecting  the  food  supplies  or  necessa- 
ries generally.  It  is  to  this  latter  cause  that  the  work  of 
Malthus  was  mainly  directed,  though  indirectly,  owing  to 
the  necessary  connection  of  economic  forces,  other  con- 
siderations are  introduced. 

2.  The  Three  Propositions  of  Malthus.  —  The  theory  of 
Malthus  as  summarised  by  himself  may  be  stated  in  three 
propositions  and  a  qualification. 

The  first  proposition  states  that  population  is  necessarily 
limited  by  the  means  of  subsistence.  This  proposition 
is  obviously  true,  and  the  only  point  to  notice  is  that  the 
phrase  means  of  subsistence  must  include  more  than  food, 
e.g.  fuel  and  the  means  of  providing  clothing  and  shelter ; 
and  as  civilisation  advances  a  still  more  extended  mean- 
ing must  be   given.     But  taking  food  alone,  it  is   plain 


80  ELEMENTS  OF  POLITICAL   ECONOMY 

that  the  supply  of  food  itself  is  one  of  the  necessary 
limits  to  any  possible  increase  of  population. 

The  second  proposition  may  be  given  in  Malthus's  own 
words,  "Population  invariably  increases  when  the  means 
of  subsistence  increase,  unless  prevented  by  powerful  and 
obvious  checks."  This  proposition  is  itself  given  with 
an  important  qualification,  namely,  that  the  increase  in 
the  means  of  subsistence  must  be  such  as  the  masses  of 
the  people  can  command ;  that  is  to  say,  the  actual  system 
of  the  distribution  of  wealth  must  be  taken  into  account. 
It  is  plain  that  this  second  proposition,  even  with  the 
qualification  appended,  needs  an  inductive  proof.  And 
such  a  proof  is  attempted  by  ISIalthus  in  an  elaborate 
investigation. 

This  proposition  has  also  been  most  liable  to  misunder- 
standing. The  point  is  not  that  population  must  increase 
if  subsistence  increases,  but  only  that  it  will  so  increase 
unless  the  tendency  is  counteracted  by  certain  checks. 
As  a  matter  of  history,  taking  the  population  of  any  nation 
as  a  whole,  there  has  very  seldom  been  any  pressure  on 
the  means  of  subsistence,  though  there  has  nearly  always 
been  a  certain  class  of  the  society  which,  having  regard  to 
its  command  of  purchasing  power,  has  not  sufficient  food 
to  rear  the  children  that  are  born. 

The  question  then  arises.  What  are  these  checks?  and 
the  answer  is  given  in  the  third  proposition.  "  These 
checks  and  the  checks  which  keep  the  population  down 
to  the  level  with  the  means  of  subsistence  are  moral  re- 
straint, vice,  and  misery."  The  ultimate  check  is  the 
want  of  food,  but  this  ultimate  check  is  never  the  imme- 
diate check  except  in  cases  of  actual  famine.     Famine  is, 


THE  principlp:  of  population  81 

however,  comparatively  rare,  and  consequently  the  imme- 
diate checks  must  be  sought  for  in  other  conditions. 

These  checks  may  be  divided  into  two  great  classes, 
namely,  those  which  tend  to  diminish  the  birth-rate  and 
those  which  increase  the  death-rate ;  the  former  are 
styled  preventive  and  the  latter  positive.  The  preven- 
tive checks  are,  speaking  broadly,  either  of  the  nature  of 
moral  restraint  or  of  vice.  By  Malthus,  the  expression 
moral  restraint  is  used  in  a  narrow  sense  as  equivalent 
to  abstinence  from  marriage  not  accompanied  by  irregular 
gratifications.  The  preventive  checks  that  come  under 
the  head  of  vice  are  found  to  exist  in  the  lowest  stages  of 
barbarism  and  in  the  highest  stages  of  civilisation. 

Of  the  positive  checks  some  arise  unavoidably  from  the 
laws  of  nature,  e.g.  the  inclemency  of  the  seasons  or  the 
exhaustion  of  natural  resources.  To  these  the  name  of 
misery  is  specially  applied.  Other  positive  checks,  how- 
ever, are  wholly  or  partially  the  results  of  vice  (in  a  large 
sense),  such  as  wars  and  excesses  of  various  kinds.  For 
the  illustration  and  the  inductive  proof  of  the  operation 
of  these  checks,  the  student  must  refer  to  the  essay  itself. 
He  will  find  incidentally  many  correctives  to  popular 
opinions.  Thus  the  permission  of  infanticide,  as  in  China, 
is  said  to  be  a  cause  of  increase,  not  of  diminution  of 
population ;  for  the  permission  removes  the  fear  of  the 
consequences  of  early  marriages,  but  when  the  children 
are  born,  the  natural  instincts  override  the  permission 
except  in  cases  of  extreme  necessity.  Again,  slavery  is 
unfavourable  to  an  increase  of  numbers,  while  with  great 
and  continuous  emigration  population  may  increase. 

To  resume  the  main  argument ;    the  sum  of  all  these 


82  ELEMENTS  OF  POLITICAL  ECONOMY 

preventive  and  positive  checks  taken  together  forms  the 
immediate  check  to  population ;  and  in  every  country 
some  of  them  are  in  constant  operation  with  more  or  less 
force.  In  general,  also,  there  is  a  part  of  the  population 
that  tends  to  multiply  to  such  an  extent  as  to  press  on 
the  means  of  subsistence  —  always,  that  is  to  say,  having 
regard  to  its  command  of  purchasing  power.  It  is  quite 
possible,  however,  that  apart  from  this  lowest  class  the 
increase  of  population  may  be  less  rapid  than  is  advanta- 
geous to  the  community  at  large.  Accordingly,  in  deal- 
ing with  questions  of  population,  it  is  necessary  to  consider 
the  various  classes  as  well  as  the  aggregate. ^ 

1  See  Bonar,  Malthus  and  his  Work ;  also  Philosophy  and  Political 
Economy,  Bk.  Ill,  Chap.  I ;  Cannan,  Theories  of  Production  and  Distri- 
bution; Nicholson,  Historical  Progress  and  Ideal  Socialism. 


CHAPTER  VIII 

THE  GROWTH  OF  CAPITAL 

1.  Meaning  of  the  Growth  of  Capital.  — There  is  a 
popular  idea  that  the  greater  part  of  the  capital  of  a 
nation  has  been  accumulated  in  the  distant  past,  and  that 
each  year  only  produces  the  increase.  The  principal 
object  of  Mill's  third  proposition  on  capital  was  to  call 
attention  to  the  erroneous  nature  of  this  idea ;  he  points 
out  that  all  capital  is  consumed  (meaning  destroyed  as 
such),  and  is  being  continually  reproduced.  In  modern 
societies  it  may  be  said  that  it  is  only  the  value  that 
remains  constant,  the  things  that  possess  the  value  being 
subject  to  change.  From  this  point  of  view  any  differ- 
ence in  value  constitutes  profit  (or  loss) ;  and  if  there  is 
a  surplus  profit,  it  may  be  added  to  capital  or  immediately 
consumed  as  income. 

The  root  idea  of  the  various  forms  of  capital  is,  as 
already  explained,  "  prospectiveness " ;  in  other  words, 
the  characteristic  utility  of  capital  is  the  satisfaction, 
directly  or  indirectly,  of  future  needs  and  desires.  The 
constituents  of  real  income  satisfy  present  needs.  It 
follows  that  the  simplest  form  of  creating  capital  is  put- 
ting aside  directly  a  stock  of  consumable  goods  for  future 
use,  e.g.  the  corn  buried  by  the  ancient  Germans  in  the 
ground,  and  similar  primitive  hoards.  This  is  saving  in 
the  most  elementary  sense.     Even  in  this  case  it  may  well 

83 


84  ELEMENTS  OF  POLITICAL  ECONOMY 

happen  that  the  saving  is  made  from  a  stock  that  is  for 
the  time  being  superfluous ;  but  in  general  the  provision 
of  the  surplus  will  involve  a  certain  amount  of  labour  or 
effort,  or  there  may  be  a  conflict  between  present  and 
future  needs.  Thus,  generally  it  may  be  said  that  the 
creation  of  capital  involves  in  some  way  the  sacrifice  of 
present  to  future  utility.  This,  however,  is  only  true  in 
the  broad  meaning  of  the  terms,  and  it  cannot  be  said  that 
in  modern  industrial  societies  the  sacrifice  on  the  part  of 
the  great  capitalist  involves  any  personal  abstinence  from 
present  consumption.  As  regards  smaller  incomes,  how- 
ever, this  choice  between  the  present  and  the  future  must 
often  be  made. 

In  modern  societies,  however,  even  in  these  cases,  the  sav- 
ing is  not  of  the  character  of  hoarding.  It  depends  rather 
on  the  direction  that  is  given  to  industry  by  the  demand, 
or  on  the  distribution  of  purchasing  power.  The  process 
is  at  the  same  time  facilitated  and  concealed  by  the  inter- 
vention of  money.  A  person  with  a  certain  money  income 
has  so  far  a  certain  command  of  the  national  wealth.  His 
money  demand  or  expenditure  will  set  in  motion  certain 
industrial  forces.  He  may  elect  to  buy  things  for  direct 
immediate  use  of  such  a  kind  that  they  are  destroyed 
without  leaving  anything  of  utility  for  the  future.  Or 
he  may  demand  quasi-permanent  forms  of  consumption- 
capital  ;  or  directly  by  purchase  for  his  own  business  or 
indirectly  by  investment  in  the  businesses  of  other  people 
he  may  demand  various  forms  of  productive  capital.  The 
most  effective  criticism  of  Mill's  fourth  proposition  on 
capital  (that  demand  for  commodities  is  not  demand  for 
labour),  is  afforded  by  regarding  the  real  national  income 


THE   GROWTH  OF  CAPITAL  85 

as  a  flow  or  stream  of  commodities  that  is  continuously 
resulting  from  the  use  of  the  national  productive  agents. 
According  to  the  orders  of  consumers  or  of  those  possess- 
ing the  money  incomes,  more  or  less  of  this  stream  is 
directed  to  the  satisfaction  of  future  wants,  and  thus  to 
the  future  employment  of  labour. 

2.  The  Limits  to  the  Growth  of  Capital  during  any  Period. 
—  In  modern  industrial  societies,  in  measuring  the  growth 
of  capital  it  is  necessary  to  use  money.  We  cannot,  like 
the  ancient  patriarchs,  enumerate  the  details  of  our  posses- 
sions, the  oxen,  the  camels,  the  asses.  It  is  only  by 
using  money  as  the  measure  that  we  can  allow  for 
substitutes,  and  the  increasing  variety  of  the  forms  of 
capital. 

With  this  proviso  it  may  be  said  that  the  maximum 
that  can  be  added  to  the  material  capital  of  any  society 
during  any  period,  say  a  year,  is  the  total  net  product,  — 
that  is  to  say  the  excess  of  the  annual  produce  above 
what  is  needed  to  provide  for  the  efficiency-necessaries  of 
the  workers,  the  supply  of  raw  material,  etc.,  the  repair  of 
the  auxiliary  capital,  etc.,  and  keeping  up  the  consumption- 
capital  (e.g.  the  dwelling-houses).  The  forms  of  capital, 
and  also  the  net  product  must  be,  as  explained  above, 
measured  in  money.  This  real  net  product,  measured  in 
this  way,  obviously  includes  more  than  the  profits  on 
capital  (in  the  widest  sense  of  the  term  profits),  as  sav- 
ings (in  the  economic  sense)  may  be  made  from  wages, 
especially  if  the  term  is  used  so  as  to  cover  the  highest 
forms  of  labour,  e.g.  professional  skill. 

The  amount  of  the  net  product  will  depend  in  the 
first  place  on  the  total  annual  dividend  or  real  national 


86  ELEMENTS   OF  POLITICAL  ECONOMY 

income.  The  larger  the  gross  income,  so  much  larger, 
other  things  remaining  the  same,  is  the  net  product. 

The  net  product  will  be  increased  by  anything  that 
increases  the  efficiency  of  the  productive  agents  or  econo- 
mises their  use.  Thus,  in  considering  the  possible  in- 
crease of  the  net  product,  we  are  concerned  with  the 
limits  of  the  power  to  save ;  in  considering  the  causes 
that  induce  people  to  save  rather  than  to  consume  their 
wealth  immediately,  we  are  concerned  with  the  will  to 
save.  The  actual  saving  affected  during  any  period  will 
depend  on  these  two  groups  of  causes. 

3,  The  Power  to  Save.  —  In  considering  the  causes  that 
affect  the  power  to  save,  and  changes  in  that  power,  we 
must  take  account  of  all  the  factors  of  national  produc- 
tion. Here  it  will  suffice  to  enumerate  simply  the  princi- 
pal headings  under  which  the  inquiry  must  be  made  as 
regards  the  aggregate  production  and  its  cost  —  including, 
under  the  term  cost^  the  various  elements  noticed  above 
requisite  to  keep  the  forms  of  capital  in  statu  quo. 

Such  are  the  natural  resources  and  powers  (see  Chap.  II)  ; 
the  efficiency  of  labour  and  capital  (see  Chaps.  II- V)  ; 
and  the  amounts  taken  by  government  for  public  purposes. 
In  this  last  case  the  indirect  expenses  (^e.g.  restraints  on 
trade),  and  burdens  (e.g.  conscription),  as  well  as  the 
taxes,  must  be  taken  account  of ;  and  per  contra  the  nature 
of  the  expenditure  of  the  public  revenue  must  be  consid- 
ered. Other  elements  to  notice  are  the  extent  of  foreign 
trade,  the  means  of  transport  and  communication,  and  the 
credit  system  of  the  country.  Whether  credit  itself  should 
be  included  under  capital  is  a  question  of  definition,  but 
there  can  be  no  doubt  that  credit  increases  the  efficiency 


THE  GROWTH  OF  CAPITAL  87 

of  the  productive  agents  in  the  same  way  as  improvements 
in  auxiliary  capital,  and  it  also  effects  economies  that  are 
equivalent  to  the  saving  of  capital. 

4.  The  Will  to  Save.  — The  will  to  save,  in  the  economic 
sense  of  turning  wealth  to  capital  uses,  depends  on  and 
varies  with  a  number  of  factors. 

One  of  the  most  far-reaching  and  varied  in  its  modes  of 
working  is  security.  If  there  is  to  be  any  saving  at  all, 
there  must  be  security  that  what  is  saved  will  be  pre- 
served to  or  enjoyed  by  the  owner,  at  any  rate  to  such 
an  extent  as  to  balance  the  sacrifice  and  effort  required 
to  create  the  capital.  Even  slaves,  it  has  been  found,  will 
save  out  of  their  small  pecuUum  if  sure  of  their  savings. 
Security  includes  the  security  afforded  by  the  state  against 
violence  or  fraud  or  breach  of  contract  on  the  part  of 
individuals,  and  also  protection  against  the  arbitrary  exac- 
tions of  the  government  itself.  Arbitrary  and  oppressive 
taxation  is  one  of  the  greatest  hindrances  to  the  accumu- 
lation or  investment  of  capital.  Compare  the  provinces 
under  Turkish  misrule  with  Egypt  under  British  adminis- 
tration. There  must  also  be  security  against  the  violence 
and  uncertainty  of  the  powers  of  nature.  If  a  country  is 
liable  to  frequent  earthquakes  or  other  physical  disasters, 
or  has  an  unhealthy  climate,  life  and  property  are  uncer- 
tain and  little  store  is  set  by  the  future. 

What  is  spoken  of  as  the  effective  desire  of  accumula- 
tion really  consists  of  a  group  of  motives.  It  may  be 
weak  from  intellectual  deficiency  or  lack  of  the  telescopic 
faculty  (Marshall),  as  in  the  case  of  the  Indians  men- 
tioned by  Mill,  and  indeed  of  primitive  peoples  gen- 
erally ;  or  there  may  be  moral  deficiencies,  e.(^.  no  strong 


88  ELEMENTS  OF  POLITICAL  ECONOMY 

interest  in  others,  no  sufficient  family  affection,  no  desire 
to  avoid  dependence  in  old  age.  The  hope  of  rising  in 
the  social  scale  and  the  importance  attached  to  the  mere 
possession  of  wealth  as  such,  apart  from  its  uses,  have 
always  been  factors  of  importance,  and  were  perhaps  never 
stronger  than  at  present. 

The  way  in  which  the  aggregate  of  the  national  wealth 
is  distributed  amongst  the  different  classes  of  the  com- 
munity often  makes  considerable  difference.  Thus,  as 
wealth  was  transferred  from  the  landed  aristocracy  to 
the  mercantile  and  industrial  classes  the  growth  of  capital 
increased.  Facilities  for  investment  promote  saving ;  the 
savings  of  the  working  classes  have  been  greatly  stimu- 
lated by  the  extension  of  savings-banks,  building  societies, 
etc.,  while  the  development  of  joint-stock  enterprise  has 
promoted  saving  generally.  In  the  latest  returns  to 
Schedule  D  of  the  British  Income  Tax  the  gross  assess- 
ments on  the  incomes  of  public  companies  exceeds  the 
amount  on  the  profits  of  private  persons  and  firms. 

The  effect  of  the  rate  of  interest  depends  on  a  balancing 
of  opposing  influences.  If  the  rate  is  high,  or  rises,  so  far 
there  is  a  greater  reward  for  saving,  and  thus  a  direct 
encouragement  to  save.  This  high  rate  may,  however, 
react  on  labour.  For,  other  things  remaining  the  same, 
if  more  goes  by  way  of  interest  to  capital,  there  is  so 
much  less  for  the  wages  of  labour  ;  thus,  so  far  there  is 
less  stimulus  to  exertion,  less  efficiency,  and  on  the  whole 
a  smaller  fund  or  "  flow "  from  which  savings  can  be 
made.  Thus  a  very  high  rate  may  check  accumulation  by 
lessening  production.  Adam  Smith  argued  that  the  high 
rate  of  profit  due  to  the  monopoly  of  the  colonial  trade 


THE   GROWTH  OF  CAPITAL  89 

had,  on  the  whole,  an  adverse  influence  on  accumulation 
partly  because  it  increased  the  extravagance  of  merchants 
and  checked  "parsimony." 

Again,  a  high  rate  may  be  a  sign  of  insecurity  generally. 

Thus,  on  the  whole,  we  cannot  say  that  if  the  rate  of 
interest  rises  there  will  be  an  increase  in  the  rate  of 
accumulation. 

If  the  rate  is  low,  or  falls,  people  must  save  more  for  an 
annuity  of  a  certain  amount,  and  thus  more  is  devoted  to 
the  forms  of  insurance.  Labour  also  obtains  a  greater 
reward,  and  the  industrial  machine  works  so  far  at  higher 
pressure.  A  low  rate  of  interest  also  gives  a  stimulus  to 
new  undertakings  that  give  promise  of  a  better  return. 
"John  Bull  can  stand  most  things  but  he  cannot  stand 
two  per  cent." 

A  low  rate  of  interest  may  be  a  sign  of  good  security. 

5.  The  Growth  of  the  Different  Species  of  Capital.  —  So 
far  the  question  of  the  growth  of  capital  has  been  treated 
as  if  the  national  capital  were  homogeneous  in  character 
and  as  if  the  various  causes  examined  operated  uniformly ; 
it  is  necessary,  however,  to  distinguish  different  cases. 

As  regards  circulating  capital,  including  raw  materials, 
labourers'  necessaries,  etc.,  the  better  the  industrial  organ- 
isation so  much  the  less  need  is  there  for  an  accumula- 
tion of  stocks.  The  forms  of  capital  are  continuously 
replaced  as  they  are  required.  In  place  of  the  storing 
up  of  a  fund  we  have  the  direction  or  control  of  a  stream 
or  flow.  The  idea  of  public  granaries  is  a  case  of  rever- 
sion to  a  primitive  tj'pe. 

On  the  other  hand,  the  forms  of  consumption-capital 
(in  the  sense  defined),  e.g.  houses  and  their  furnishings 


90  ELEMENTS  OF  POLITICAL  ECONOMY 

of  all  kinds,  tend  to  increase  greatly,  both  in  quantity 
and  in  value  (as  indicating  quality).  This  is  especially 
the  case  with  a  low  rate  of  interest,  because  it  becomes 
cheaper  to  build  new,  than  to  rent  old,  houses.  In  the 
course  of  industrial  progress,  the  forms  of  fixed  and 
auxiliary  capital  tend  to  increase  greatly.  The  law  of 
substitution  (Marshall),  that  is  to  say  the  substitution  of 
less  expensive  for  more  expensive  agents  or  factors 
of  production,  is  exemplified  by  the  displacement  of  costly 
labour  by  machinery.  The  application  of  new  scientific 
ideas  to  industry  also  generally  involves  the  creation  of 
new  forms  of  capital. 

Land  and  natural  agents  are  not  as  a  rule  included 
under  capital  in  the  department  of  production,  and  strictly 
they  are  incapable  as  such  of  increase.  But  they  may  be 
indefinitely  improved  by  the  capital  that  is  sunk  in 
them.  Adam  Smith  regarded  agricultural  improvements 
of  a  permanent  character  as  the  most  advantageous  of 
all  the  forms  of  national  accumulation.  But  the  amount 
of  capital  in  this  form  depends  largely  on  the  competition 
of  foreign  supplies  with  home  produce.  Recently  in  the 
United  Kingdom,  in  contrast  with  the  great  'growth  of 
capital,  generally  there  has  been  a  falling  off  in  many 
districts  in  the  amount  of  the  capital  sunk  in  the  land. 
And  capital  in  this  form,  like  other  forms  of  capital, 
needs  constant  renewal. 

Similar  reasonings  may  be  applied,  mutatis  mutandis,  to 
the  various  forms  of  immaterial  capital,  e.g.  the  develop- 
ment of  banking  and  credit  generally,  and  of  systems  of 
education.  Some  of  these  forms  are  more  fully  treated 
at  a  later  stage  (Book  III). 


THE  GROWTH  OF  CAPITAL  91 

6.  The  Limits  to  the  Production  of  Wealth.  —  As  illus- 
trating the  course  of  the  argument  of  the  last  three  chap- 
ters, attention  may  be  directed  to  the  statement  by  Mill, 
that  the  limited  quantity  of  land  and  its  limited  produc- 
tiveness form  the  real  limits  to  the  production  of  wealth. 
This  position  appears  to  be  due  partly  to  Mill's  exag- 
gerated idea  of  the  operation  of  the  law  of  diminishing 
return,  and  its  consequences  on  population  and  the  food 
supplies,  and  partly  it  seems  to  be  a  survival  of  the 
Physiocratic  analysis  of  production,  namely,  that  only 
labour  devoted  to  the  land  could  increase  the  aggregate 
of  national  wealth.  But  even  if  we  take  an  isolated 
country,  and  suppose  that  for  a  long  period  the  same 
amount  of  raw  materials  of  all  kinds  are  taken  from  the 
earth  by  the  same  methods,  there  may  still  be  a  contin- 
uous increase  in  the  quantity  of  wealth.  The  labour 
may  become  indefinitely  more  efiQcient  and  skilful,  and 
the  raw  materials  may  be  worked  up  into  more  and  more 
complex  and  artistic  forms  of  wealth.  In  fact,  as  Malthus, 
himself  pointed  out,  wealth  may  increase  indefinitely 
long  after  agriculture  has  become  stationary. 

But  notably  in  the  modern  world,  and  specially  as 
regards  the  United  Kingdom,  any  one  country  is  not 
isolated  as  regards  its  food  and  raw  materials.  In  any 
country,  the  production  of  manufactures  can  be  increased 
indefinitely  so  long  as  the  labour  and  capital  are  forth- 
coming; and  the  whole  world  is  open  for  the  provision 
of  materials  and  food  supplies.  So  long  then  as  this 
country  can  find  markets  for  its  manufactures,  the  limita- 
tion of  its  land  cannot  check  the  growth  of  its  wealth. 
It  is  sometimes  argued  that  the  food-supplying  countries 


92  ELEMENTS  OF  POLITICAL  ECONOMY 

themselves,  increase  in  population,  and  will  in  time  re- 
quire all  that  they  produce.  But,  as  will  appear  more 
clearly  under  foreign  trade,  a  nation  must  not  be  regarded 
as  an  individual  ;  it  consists  of  a  number  of  classes  with 
divergent  interests  ;  it  is  to  the  interest  of  the  farmers 
to  sell  to  the  highest  bidder,  and  a  rich  manufacturing 
nation  would  always  furnish  a  richer  set  of  customers 
than  the  poorest  classes  in  the  food-producing  country. 
Of  course  theoretically  there  might  be  some  danger  of 
prohibition  of  the  export  of  food,  but  this  could  hardly 
arise  in  all  countries  at  once,  and  the  blow  to  the  agricul- 
tural interest  would  be  so  severe  that  the  case  is  of  little 
practical  concern.^ 

1  See   Giffen,    Growth  of  Capital ;    Marshall,   Principles,   Book  IV, 
Chap.  VII;  Boehm-Bawerk,  Cajpital  and  Interest  (translated  by  Smart). 


BOOK  II 
DISTRIBUTION 


CHAPTER  I 

DISTRIBUTION   AND  PROPERTY 

1.  Meaning  of  Distribution.  —  In  popular  discourse,  the 
term  distribution  often  refers  to  the  transference  of  com- 
modities from  place  to  place  or  from  person  to  person ; 
or,  in  other  words,  the  term  refers  to  the  operations  of 
wholesale  and  retail  trade  as  contrasted  with  production 
in  the  narrow  sense  of  manufacture,  etc.  But  as  already 
explained,  logically  distribution  in  this  sense  is  part  of 
production:  there  is  a  continuity  of  processes  until  the  com- 
modity is  in  the  hands  of  the  consumer.  There  is  no 
doubt  one  aspect  of  trade  that  calls  for  special  treatment, 
namely,  the  causes  that  determine  the  rates  of  exchange. 
This  is  the  problem  of  the  third  great  department  of 
economics. 

Distribution  in  the  economic  sense  (here  adopted)  refers 
to  the  division  of  the  wealth  of  a  nation  amongst  the 
different  classes.    The  leading  conception  is  appropriation. 

The  first  problem  of  distribution  in  this  sense  is  to 
examine  the  meaning  and  the  economic  foundations  of 
the  institution  of  property,  and  the  limitations  that  are 
imposed  on  the  right  of  property  under  different  condi- 
tions. It  is  found  that  the  idea  varies  between  two 
extremes :  in  the  one  the  power  of  the  individual  is  as 
large  as  possible ;  in  the  other,  the  power  of  the  state,  as 
expressed  by  the  central  or  local  authorities,  is  dominant. 

95 


96  ELEMENTS  OF  POLITICAL  ECONOMY 

Thus,  on  the  one  side,  we  have  the  various  forms  of  private 
property ;  and  on  the  other  the  various  forms  of  property 
in  common  (^e.g.  village  communities)  that  have  existed 
or  still  exist,  and  the  various  forms  of  socialism  that  for 
the  most  part  must  be  regarded  as  ideal. 

The  second  great  problem  is  to  determine  the  economic 
laws  that  govern  the  quantitative  distribution :  first,  of 
the  agents  or  means  of  production,  that  is,  the  land,  the 
capital,  and  the  labour  (when  labour,  as  in  slavery,  is  the 
subject  of  appropriation)  ;  in  this  connection  it  may  be 
remarked  that  the  economic  characters  and  the  effects  of 
the  laws  of  bequest  and  inheritance  are  of  fundamental 
importance.  And  secondly,  this  part  of  distribution 
treats  of  the  incomes  derived  from  these  agents ;  that  is, 
the  rents,  profits,  and  wages.  Here,  in  modern  societies, 
exchange  is  in  many  respects  fundamental,  and  the  dis- 
tribution of  incomes  may  be  said  to  depend  on  contracts 
made  for  the  exchange  of  the  services  of  the  productive 
agents.  But  exchange  has  not  always  been  predominant 
in  this  way;  on  the  contrary,  here  also  the  movement  of 
progressive  societies  has  been  from  status  to  contract; 
incomes  were  formerly  determined  largely  by  law,  and 
custom  with  the  force  of  law,  external  to  the  individuals 
concerned,  and  independently  of  their  particular  bargains. 
Even  under  modern  conditions  the  forces  included  under 
law  and  custom  affect  distribution  to  a  considerable 
extent.  Lately  in  Ireland  and  the  Highlands  of  Scot- 
land, there  has  been  a  reversion  to  the  method  of  judicial 
rents,  and  in  some  of  the  colonies  attempts  have  been 
made  at  judicial  wages. 

It  is  plain  from  this  brief  survey  that  the  problems  of 


DISTRIBUTION   AND  PROPERTY  97 

distribution  in  the  sense  defined  cannot  be  brought  logi- 
cally under  exchange.  In  the  department  of  exchange,  as 
a  rule,  nothing  is  said  of  the  institution  of  property  or  the 
laws  of  bequest  and  inheritance ;  similarly,  there  is  little 
scope  for  the  discussion  of  the  economic  effects  of  laws 
affecting  certain  forms  of  property  (e.g.  the  land  laws),  or 
of  laws  affecting  certain  contracts  for  wages,  especially 
real  wages. 

At  the  same  time  it  may  be  admitted  that  many  of  the 
problems  of  distribution,  especially  as  regards  incomes, 
depend  on  value.  But,  as  already  observed,  all  the  eco- 
nomic departments  are  closely  interconnected. 

2.  On  the  Nature  of  the  Laws  of  Distribution.  —  It  was 
shown  at  an  earlier  stage  that  the  expression  economio 
Imvs  admits  of  very  different  interpretations  as  regards 
cogency.  Mill  tried  to  show  that  there  Avas  a  sharp  dis- 
tinction between  the  laws  of  the  production  and  those  of 
the  distribution  of  wealth.  The  former,  he  declared,  par- 
take of  the  character  of  physical  laws — there  is  nothing 
optional  or  arbitrary  about  them ;  whilst  the  latter  are  of 
human  institution  only.  I  have  examined  this  distinction 
(which  Mill  regarded  as  his  most  important  contribution 
to  political  economy)  in  detail  in  the  larger  work ;  for  the 
present  purpose  it  may  suffice  to  say  that  the  distinction 
is  one  of  degree  only :  the  laws  of  production  are  not 
purely  physical  nor  are  the  laws  of  distribution  purely 
arbitrary ;  though,  in  certain  cases  in  the  latter,  human 
wishes  have  greater  influence  than  in  the  former.  The 
reason  why  Mill  attached  so  much  importance  to  his  dis- 
covery was  that  in  it  he  found  a  theoretical  justification 
for  socialism,  even  in  its  most   extreme  forms.     On  this 


98  ELEMENTS  OF  POLITICAL  ECONOMY 

view,  "  once  the  things  are  there  "  (as  determined  by  the 
conditions  of  production),  the  state  or  society  may  do  as 
it  pleases  with  the  distribution  —  or  in  Mill's  phrase,  none 
of  these  ideal  schemes  are  truly  impracticable,  that  is  to 
say,  not  in  the  sense  in  which  an  indefinite  increase  from 
a  limited  portion  of  land  is  physically  impossible.  It 
may  be  replied  that  the  practicability  of  socialistic  schemes, 
with  any  real  meaning  of  the  term,  cannot  be  decided  in 
this  abstract  manner.  In  reality.  Mill's  argument  relies 
on  a  legal  or  political  conception  that  requires  careful 
qualification  in  jurisprudence  or  political  science,  and  in 
economics  is  of  doubtful  value  in  any  sense.  I  refer  to 
the  conception  of  sovereignty. 

3.  The  Conception  of  Sovereignty  and  its  Application  to 
Distribution.  —  The  idea  of  sovereignty  as  expounded  in 
analytical  jurisprudence  (e.g.  by  Austin,  who  had  great 
influence  on  Mill)  is  that  in  every  independent  political 
society  there  is,  so  to  speak,  a  centre  of  power  which,  rela- 
tively to  the  members  of  the  society,  is  absolutely  supreme. 
In  the  theory  of  jurisprudence  this  idea  is  sometimes 
useful,  and  it  must  be  assumed,  generally,  that  any 
positive  law  enacted  by  the  supreme  political  power  can 
be  enforced.  But  as  used  by  Mill  it  was  associated  with 
another  idea  which 'may  be  expressed  in  the  form  of  the 
"indefinite  pliability  of  public  opinion."  This  was  the 
great  motive  power  on  which  the  old  radicals  such  as 
Godwin  relied.  Since,  at  any  rate,  in  any  democratic 
society,  public  opinion  is  the  ultimate  source  of  political 
power,  we  have  only  to  get  any  scheme  approved  of  and 
it  may  be  put  into  operation ;  and  if  enforced  by  the 
sovereign  power  it  must  succeed  (theoretically). 


DISTRIBUTION   AND  PROPERTY  99 

It  may  be  objected  to  this  line  of  argument  that  it  is 
exactly  opposed  to  the  leading  idea  of  the  traditional 
economic  doctrine  that  begins  with  Adam  Smith  and 
culminates  in  Mill  himself  (in  the  last  chapter  of  his 
work).  The  fundamental  assumption  of  laissez  faire  is 
that  the  economic  power  of  government  is  extremely 
limited,  especially  for  the  achievement  of  beneficial  objects. 
At  this  point  it  is  impossible  to  do  more  than  state  the 
fundamental  opposition  between  these  ideas  of  the  un- 
limited, and  the  extremely  limited,  powers  of  government.^ 

4.  Economic  Definition  of  Private  Property.  —  In  modern 
industrial  societies  the  institution  of  private  property  is 
generally  prevalent  as  contrasted  with  primitive  societies, 
in  which  land  in  particular  was  held  in  common.  The 
extent  to  which  private  property  has  prevailed  at  different 
stages  of  progress  is  a  subject  to  which  great  attention 
has  been  devoted  recently,  and  a  certain  reaction  has  set 
in  against  the  extreme  views  that  were  current  on  the 
communistic  character  of  Jill  forms  of  primitive  property. 

It  is  a  case  in  which  it  is  absolutely  necessary  to  apply 
the  historical  method.  Nothing  can  be  more  fallacious 
than  the  attempts  to  construct  the  social  arrangements  of 
primitive  societies  by  the  simple  plan  of  divesting  human 
beings  of  their  civilised  surroundings  and  supposing  that 
otherwise  there  would  be  no  change  in  their  thoughts  or 
ideas ;  to  suppose,  for  example,  that  primitive  man  actu- 
ally did  act  just  as  civilised  man  might  be  supposed  to  act, 
if  thrown  by  shipwreck  on  a  desert  island.  In  truth,  as 
Sir  Henry  Maine  (the  great  populariser  of  the  historical 

1  The  economic  functions  and  powers  of  governments  are  examined  at 
length  in  Book  V  of  this  work. 


100  ELEMENTS  OF   POLITICAL  ECONOMY 

method  in  tliis  country)  observes,  in  general,  it  would  be 
safer  to  suppose  that  in  primitive  times  men  would  act 
in  quite  a  different  manner.  Recent  researches  on 
comparative  superstitions  have  shown  in  a  striking  way 
how  widely  different  are  the  ancient  and  the  modern  ideas 
of  what  is  natural  in  social  arrangements.  And  in  primi- 
tive times  religion  had  great  influence  on  economic  ideas 
and  practices.  With  this  brief  indication  of  the  diffi- 
culties involved  in  tracing  the  actual  development  of 
private  property,  we  may  pass  at  once  to  the  definition  as 
applicable  in  modern  industrial  societies.  And  for  this 
purpose  the  statement  of  Sidgwick  {Elements  of  Politics, 
Chap.  V)  may  be  taken  as  the  basis.  "  The  right  of  prop- 
erty, when  used  without  qualification,  involves  the  com- 
plete right  of  exclusive  and  quasi-permanent  use,  the  right 
to  destroy,  and  the  right  to  alienate  (i.e.  to  dispose  of 
to  another  by  gift  or  sale)  but  not  necessarily  or  logically 
the  right  of  bequest."  It  may  be  remarked,  as  showing 
the  difficulty  of  the  subject  even  when  we  are  dealing 
with  abstract  conceptions,  that  Mill  is  of  opinion  that  the 
right  of  bequest  is  logically  included.  Leaving  for  the 
present  the  discussion  of  this  point,  we  have  next  to  con- 
sider what  are  the  economic  foundations  of  this  right. 

5.  The  Economic  Bases  of  Private  Property.  —"The 
foundation  of  the  whole  institution,"  says  Mill,  "  is  the  right 
of  producers  to  what  they  have  themselves  produced." 

This  first  basis  may  be  called  briefly  the  labour  basis  of 
property.  It  may  be  traced  through  Adam  Smith  to  John 
Locke,  and  in  a  less  definite  form  to  older  writers.  It  is 
often  associated  with  the  right  to  freedom  of  labour,  i.e. 
the   right   to  exercise  one's  powers  and  faculties  in  any 


DISTRIBUTION  AND  PUOrERTY  101 

way  that  may  seem  good  to  the'itidiridiial..  Soineti-nes 
also  it  is  associated  with  the  right  to  labour,  in  the  sense 
that  the  state  ought  in  case  of  need  to  provide  its  mem- 
bers with  work.  Mill,  who  in  this  part  of  the  subject 
avowedly  introduces  ethical  reasonings,  argues  that  this 
right  to  the  results  of  one's  own  labour  is  a  natural  right 
of  mankind;  but,  without  entering  into  the  difficulties 
involved  in  the  conception  of  natural  right,  the  expediency 
of  this  basis  may  be  justified  on  purely  economic  grounds ; 
namely,  unless  we  allow  freedom  of  labour  and  the  right 
to  enjoy  the  fruits  of  labour,  the  labour  will  not  be  forth- 
coming, or  at  any  rate  not  to  the  same  extent.  Stated  in 
this  general  form,  the  principle  may  be  illustrated  abun- 
dantly from  economic  history.  As  already  pointed  out  in 
another  connection,  slave  labour  is  of  all  forms  of  labour 
the  least  efficient,  and  as  freedom  is  granted  and  the  share 
in  the  proceeds  is  increased,  the  quantity  produced  also 
increases.  The  principle  is  also  seen  in  modern  times  in 
profit-sharing,  and  it  is  well  illustrated  by  the  greater  zeal 
displayed  in  piece-work  in  which  the  extra  reward  is 
directly  associated  with  the  extra  effort. 

A  closer  examination,  however,  shows  that  this  basis, 
simple  and  obvious  as  it  may  appear  at  first  sight,  is  beset 
with  difficulties.  In  the  first  place,  as  soon  as  we  intro- 
duce division  of  labour  and  a  complex  result  due  to  the 
combination  of  many  different  forms  of  labour,  there  is 
the  difficulty  of  separating  the  shares,  e.g.  in  building  a 
great  ship,  and,  indeed,  in  any  form  of  manufacture. 

Again,  in  the  economic  justification  given,  it  will  be 
observed  that  the  right  (or  the  expediency  of  it)  is  stated 
with  a  qualification,  namely,  "to  the  same  extent."      In 


102  ELEMENTS  Q^  POLITICAL  ECONOMY 

the .  inatbematical  languaga  that  is  now  so  much  used  in 
economics,  the  work  done  is  a  function  of  the  reward. 
But,  as  shown  in  the  very  examples  just  cited,  a  moderate 
reward  may  suffice  to  call  forth  considerable  energy  on 
the  part  of  labour,  and  thus  a  large  amount  of  the  produce 
may  be  left  over  for  other  claimants  —  the  state  itself  or 
various  privileged  classes.  In  fact  the  economic  justifica- 
tion is  little  more  than  the  principle  that  is  involved  in 
the  economy  of  high  wages;  and  it  would  be  absurd  to 
say  that  the  masters  should  in  the  pursuit  of  this  economy 
surrender  all  their  profits. 

This  illustration  naturally  leads  to  the  statement  of  a 
second  basis  of  property  also  admitted  by  Mill.  People,  it 
may  be  said,  have  a  natural  right  to  the  results  of  their 
capital.  On  Mill's  view  the  capital  is  itself  the  result  of 
saving  or  sacrifice,  and  ought  as  such  to  be  rewarded. 
But  again,  without  introducing  the  ethical  "ought,"  an 
economic  justification  may  be  given  as  in  the  correspond- 
ing case  of  labour.  In  fact,  as  already  shown,  a  large 
part  of  capital  in  modern  industrial  societies  is  the  result, 
not  of  saving  or  sacrifice  in  the  narrow  sense,  but  of  that 
high  form  of  labour  called  enterprise.  It  may  also  be  said 
that,  if  a  man  has  a  right  to  the  work  of  his  head,  he  has 
a  derivative  right  to  any  results  from  that  work.  But, 
apart  from  any  right,  the  economic  principle  is  that,  unless 
capital  receives  at  least  a  share  in  the  product,  it  will  not 
be  forthcoming,  or  at  any  rate  not  to  the  same  extent; 
and  thus  it  is  to  the  interest  of  even  manual  labour  to  pay 
something  for  the  use  of  capital.  The  difficulty,  however, 
again  emerges  as  to  the  amount  of  the  reward  that  is 
necessary  or  expedient. 


DISTRIBUTION  AND  PROPERTY  103 

The  reference  to  the  distribution  of  shares  in  a  complex 
product  for  which  many  forms  of  labour  and  capital  are 
combined  leads  up  to  a  third  basis  of  property  which  also 
is  admitted  by  Mill,  on  moral  grounds,  namely,  the  co7i- 
tract  basis.  On  this  view,  people  have  a  right  to  the 
results  of  their  contracts  and  bargains.  Under  this  head- 
ing may  also  be  brought  the  right  to  receive  gifts  from 
others  —  which  at  first  sight  would  seem  to  cover  the  right 
to  give  and  receive  by  bequest.      (See  the  next  chapter.) 

This  contract  basis  may  also  be  justified  on  economic 
grounds.  Freedom  of  contract  is  the  very  breath  of 
industry  in  modern  societies,  as  is  forcibly  illustrated  by 
the  fact  that,  according  to  the  Constitution  of  the  United 
States  no  infringement  of  this  right  is  admitted.  And  it 
may  be  argued  also  that  such  a  right  is  necessary  to  give  a 
real  meaning  to  the  other  two  bases  —  that  rest,  namely, 
on  labour  and  capital.  On  this  view,  freedom  of  labour 
means  freedom  to  make  a  bargain  for  wages,  which  again 
means  (when  there  is  a  product)  a  certain  share  in  the 
product.  And  similarly  of  capital.  The  first  and  most 
natural  meaning  to  give  to  these  rights  of  labour  and 
capital  is  that  the  shares  of  the  various  parties  concerned 
should  be  adjusted  by  freedom  of  contract,  especially  in 
the  form  of  freedom  of  competition. 

And  again,  it  may  be  pointed  out  that  competition  is  the 
greatest  stimulus  to  production,  and  that  any  check  on 
competition  lessens  the  aggregate  produced. 

This  contract  basis  also  at  first  sight  seems  natural  and 
obvious,  but  it  may  easily  be  shown  that  there  are  great 
difficulties  involved.  In  fact,  it  is  to  get  rid  of  the  abuses 
that  are  alleged  to  arise  in  connection  with  freedom   of 


104  ELEMENTS   OF   POLITICAL  ECONOMY 

contract  and  competition  that  all  the  efforts  of  socialism 
are  directed.  Socialists  maintain  that  the  terms  of  the 
endless  series  of  industrial  contracts  in  modern  industry 
will  only  be  equitably  adjusted  if  all  the  parties  are  on  an 
equal  footing  as  regards  opportunity,  knowledge,  and 
generally  the  power  of  making  and  understanding  a  bar- 
gain. And  it  is  urged  that  capital  as  a  whole  has  greater 
power  than  labour,  and  that  some  forms  of  labour  have 
greater  power  than  others ;  and  besides,  there  are  all  the 
complications  introduced  by  the  existence  through  genera- 
tions of  inheritance  and  bequest. 

There  is  still  a  fourth  basis  to  consider,  namely,  the 
right  founded  on  prescription,  which  may  be  defined 
for  the  present  purpose  as  resting  on  undisturbed  posses- 
sion for  a  time.  The  period  necessary  to  give  such  a 
prescriptive  right  varies  in  different  cases  and  is  different 
in  different  systems  of  law.  This  basis  obviously  depends 
rather  on  expediency  than  on  moral  right,  and  may  be 
justified  by  such  arguments  as  the  necessity  of  a  finis 
litium  and  of  giving  certainty  to  the  interpretation  of 
contracts.  And  again,  it  may  be  said  that  security  is 
essential  to  the  prosperity  of  industrial  societies,  and  that 
the  general  reason  for  allowing  a  title  by  prescription  is 
the  necessity  of  avoiding  the  disturbance  of  security. 
At  the  same  time  it  is  equally  clear  that  there  is  no 
prescriptive  right  in  institutions.  The  mere  antiquity 
of  an  institution  does  not  even  give  a  presumption  that 
it  ought  not  to  be  disturbed.  In  fact,  with  modern  ideas  of 
evolution,  the  presumption  may  be  said  to  lean  the  other 
way ;  what  was  suited  to  the  ancient  or  the  mediaeval 
man  it  may  be  thought  will  probably  not  be  suited  to 


DISTRIBUTION   AND  PROPERTY  105 

the  modern  with  the  great  change  in  social  conditions. 
And  it  would  be  absurd  to  suppose  that  no  change  in 
the  institutions  of  a  country  is  to  be  made  simply  because 
in  the  period  of  transition  there  must  be  some  shock  to 
security  and  some  disappointment  of  even  reasonable 
expectations.  In  making  changes  of  this  kind  the  princi- 
pal question  that  arises  is :  have  the  interests  adversely 
affected  any  claim  to  compensation  ?  —  a  question  which 
demands  separate  consideration  at  a  later  stage.^ 

1  This  chapter  corresponds  to  Book  II,  Chaps.  I  and  II  of  the 
Principles.  As  a  general  introduction  see  Maine,  Ancient  Law;  and 
on  special  points  Menger,  Bight  to  the  Whole  Produce  of  Labour  (trans- 
lated) with  Foxwell's  Introduction  ;  Sidgwick's  Political  Economy, 
Book  III,  Chaps.  VI  and  VII ;  and  Elements  of  Politics,  Chap,  V  ; 
Wagner,  Volksioirthschaftslehre,  Part  I,  Chap.  IV ;  De  Laveleye,  Primi- 
tive Property. 


CHAPTER  II 

INHERITANCE  AND  BEQUEST 

1.  Economic  to  be  distinguished  from  Legal  and  Ethical 
Ideas.  —  In  treating  of  the  laws  of  inheritance  and  bequest, 
it  is  necessary  to  separate,  as  far  as  possible,  the  economic, 
from  the  purely  legal  and  moral  aspects.  The  actual 
positive  laws  that  prevail  in  countries  of  the  same  degree 
of  civilisation,  e.g.  England,  France,  Scotland,  present 
considerable  differences,  which  can  only  be  explained  by 
an  examination  of  the  historical  development  of  the  sys- 
tems of  law  in  these  countries.  Again,  these  laws,  such 
as  they  are,  might  be  criticised  from  the  moral  stand- 
point, and  various  reforms  might  be  suggested  in  order 
to  promote  moral  ideals.  It  is  beyond  the  range  of 
economic  inquiry  to  consider,  except  indirectly,  these  legal 
and  moral  questions. 

The  economic  effects  of  inheritance  and  bequest  are, 
however,  always  of  great  importance.  The  actual  dis- 
tribution of  wealth  at  any  time  (especially  of  land) 
depends  largely  on  the  cumulative  effects  of  these  laws ; 
they  also  indirectly  have  an  influence  on  production,  and 
they  must  be  considered  in  dealing  with  the  tax  system 
of  any  country. 

2.  General  View  of  Bequest  and  Inheritance. — It  is 
obvious  on  simple  inspection  that  bequest  and  inheritance 
are  logically  opposed.  If  absolute  freedom  of  bequest 
is  allowed,  there  can  be  no  compulsory  rules  of  inheritance, 

106 


INHERITANCE   AND  BEQUEST  107 

and,  conversely,  so  far  as  such  niles  prevail  they  must 
limit  the  right  of  bequest. 

Some  writers  {e.g.  Mill)  consider  that  freedom  of 
bequest  is  part  of  the  right  of  property.  The  idea  is 
that  a  person  can  do  as  he  pleases  with  the  results  of  his 
labour  and  capital  and  contracts,  and  that  logically  death 
makes  no  difference  to  this  right.  Other  writers,  how- 
ever, maintain  that  freedom  of  gift  inter  vivos  is  on  quite 
a  different  footing  from  freedom  of  bequest.  It  is  ad- 
mitted on  both  sides  that  the  modern  idea  of  property 
implies  exclusive  use  and  power  of  alienation ;  but  those 
who  approve  of  special  limitations  on  bequest  argue  that 
as  soon  as  a  person  dies  his  individual  power  ceases,  and 
the  state  must  decide  what  is  to  become  of  his  property,  — 
the  state  may  respect  his  expressed  or  presumed  wishes, 
or  it  may  act  on  other  principles  of  distribution.  And  it 
is  the  fact  that,  both  in  the  past  and  the  present,  freedom 
of  bequest  has  been  and  is  more  limited  than  gift  inter  vivos. 

It  seems  clear  that  the  right  of  inheritance  as  such  can- 
not be  deduced  from  the  right  of  property  economically 
considered;  it  does  not  follow  from  any  of  the  funda- 
mental bases,  and  there  is  no  prescription  of  institutions. 

In  ancient  law  (Maine)  the  unit  of  society  was  the 
family,  and  the  property  was,  so  to  speak,  held  by  the 
head  in  trust  for  the  other  members  ;  in  the  case  of  death 
another  took  his  place.  So  long  as  this  was  the  ruling 
idea  inheritance  altogether  overrode  bequest.  But  one  of 
the  characteristic  features  of  economic  progress  has  been 
the  disintegration  of  the  family,  and  freedom  of  the  indi- 
vidual has  displaced  the  bonds  of  blood  relationship  to 
a  considerable  extent. 


108  ELEMENTS  OF  POLITICAL  ECONOMY 

The  development  of  freedom  of  bequest  is  of  interest 
in  showing  the  influence  of  other  social  factors  on  eco- 
nomic distribution.  The  mediaeval  church,  for  example, 
taught  that  every  person  ought  to  leave  a  part,  at  least, 
of  his  wealth  to  the  church,  for  the  benefit  of  the  poor 
and  the  good  of  his  soul.  In  time,  on  account  of  this 
teaching,  death  without  making  a  will  and  fulfilling  this 
duty  was  looked  on  with  the  greatest  horror,  and  it 
became  sinful  to  put  off  too  long  making  a  will.  One  of 
the  horrors  of  sudden  death  was  intestacy,  and  the  greatest 
calumny  to  the  dead  was  to  say  that  he  died  intestate. 
An  old  chronicler  records  of  an  enemy  of  his  convent  that 
he  was  found  poisoned,  —  and  the  climax  is  striking  — 
"dead,  black,  stinking,  and  intestate."  The  origin  and 
results  of  the  rules  of  inheritance  and  bequest  under  the 
feudal  system  are  also  indirectly  of  economic  interest,  and 
their  influence  survives  to  the  present  day. 

In  the  present  survey  it  must  suflice  to  say  that  the 
right  of  inheritance  cannot  be  supported  merely  on  the 
ground  of  long-established  custom.  The  custom  was  partly 
due  to  social  ideas  and  conditions  no  longer  prevalent,  and 
the  custom  itself  had  long  since  begun  to  be  modified  in 
favour  of  bequest. 

3.  Inheritance.  —  The  grounds  on  which  inheritance  (as 
distinct  from  bequest)  is  at  present  supported  may  now  be 
briefly  noted.  First,  it  is  said  that,  in  case  the  right  of 
bequest  is  not  exercised,  the  state  should  endeavour  to  do 
as  the  deceased  presumably  would  have  done.  Intestacy 
is  regarded  as  a  mere  accident.  It  is  true  that  the  state 
cannot  look  into  the  supposed  wishes  in  every  particular 
case,  it  must  act  on  general  rules.     The  question  then 


INHERITANCE   AXD  BEQUEST  109 

arises,  What  ought  to  be  the  basis  of  these  rules  ?  The 
usual  answer  is  that  the  state  should  found  its  rules  on 
the  prevalent  customs  of  bequest.  So  far  it  is  implied 
that  inheritance  is  to  be  considered  as  supplementary  to 
bequest.  Thus,  if,  as  a  rule,  when  people  are  left  to 
themselves,  they  leave  their  wealth  equally  amongst  their 
children  (Adam  Smith  speaks  of  this  distribution  as 
natural),  then  in  case  of  intestacy  the  state  should  make 
a  similar  distribution.  If,  on  the  other  hand,  as  regards 
property  in  general  or  some  form,  e.g.  land,  primogeniture 
is  the  custom  of  bequest,  then  it  ought  also  to  be  the 
rule  of  this  supplementary  inheritance.  Mill,  however, 
argues  in  effect  that  the  state  should  consider,  not  the 
prevalent  custom,  but  what  the  owner  ought  to  have  done 
according  to  some  ideal  of  moral  duty.  Logically,  this 
argument  seems  only  applicable  to  the  limitation  of 
bequest  in  general  in  favour  of  this  ideal.  And  even 
in  modern  times  limitations  are  imposed  on  bequest. 

4.  Bequest.  —  In  considering  the  limitations  on  the 
freedom  of  bequest,  it  may  be  observed,  first  of  all,  that, 
even  if  the  right  of  bequest  is  supposed  to  be  part  of  the 
right  of  property,  we  may  still  appeal  to  more  fundamental 
principles.  The  economic  bases  of  property  (with  which 
alone  we  are  now  concerned)  only  justify  the  institution 
in  so  far  as  it  is  necessary  or  expedient  as  a  stimulus  to 
the  exertions  of  labour  and  to  the  efforts  and  enterprises 
of  capital.  No  doubt  the  institution  of  property  may  be 
and  is  justified  on  other  grounds,  —  ethical,  jural,  and 
political,  —  but  with  these  we  are  not  concerned.  From 
the  economic  standpoint  (as  here  understood)  the  ground 
for  allowing  the  right  of  bequest  is  that  to  a  considerable 


110  ELEMENTS  OF  POLITICAL  ECONOMY 

extent  the  wishes  of  the  deceased  must  be  carried  out  as 
regards  the  disposal  of  his  wealth,  or  a  clieck  is  placed 
on  enterprise  and  accumulation.  But,  leaving  this  prin- 
ciple intact,  there  are  several  obvious  limitations  that  are 
generally  accepted.  Thus,  admitting  for  the  present  that 
property  in  land  is  expedient  on  economic  grounds  (see 
next  chapter),  still,  the  right  to  lay  down  the  order  of 
descent  of  property  in  land  for  an  indefinite  period  — 
entails  in  the  strict  sense  of  the  term  —  is  certainly  not 
necessary  to  stimulate  the  owner  to  keep  up  and  improve 
the  property,  and  on  economic  grounds,  indeed,  may  be 
shown  to  be  the  reverse  of  beneficial.  The  tendency  of  all 
recent  legislation  has  been  to  diminish  the  power  of  tying 
up  land.  Again,  as  regards  endowments,  e.g.  for  relief  of 
the  poor,  education,  or  religion,  it  is  generally  admitted 
that  after  a  certain  time  (that  varies  according  to  cir- 
cumstances) the  state  may  change  the  rules  and  regula- 
tions laid  down.  Thus  it  has  often  happened  that 
endowments  for  the  relief  of  the  poor  of  a  certain  locality 
have,  in  the  course  of  time,  by  attracting  worthless  people 
from  other  places,  done  more  harm  than  good.  Similarly, 
endowments  for  some  particular  forms  of  education,  owing 
to  changed  conditions,  may  be  actually  injurious  to  the 
educational  interests  of  a  locality  or  a  whole  country. 
Obviously,  also,  any  bequest  that  is  against  the  public 
interests  should  be  restrained,  and  sometimes  these  inter- 
ests are  mainly  economic. 

In  most  countries,  however,  bequest  is  chiefly  limited 
in  favour  of  the  children  —  that  is  to  say,  certain  rules 
of  inheritance  are  compulsory.  If  these  rules  are  prac- 
tically such  as  would  be  followed  if  freedom  of  bequest 


INHERITANCE  AND  BEQUEST  111 

were  allowed,  the  restraint  might  seem  to  be  only  formal. 
And  in  the  majority  of  cases  this  would  be  so,  but  some 
exceptions  may  be  noticed.  Compulsory  inheritance  may 
weaken  parental  control  and  lead  to  idleness  on  the  part 
of  the  children.  The  advantage  of  primogeniture,  said 
Dr.  Johnson,  is  that  it  makes  only  one  fool  in  the  family. 
Again,  it  may  well  happen  that  an  unequal  division  would 
be  more  advantageous  to  the  children  as  a  whole  —  some 
might  need  more  than  others  to  enable  them  to  carry 
on  their  business  or  profession.  And,  especially  in  the 
case  of  very  large  fortunes,  the  testator  might  with  ad- 
vantage bequeath  more  to  public  objects  than  the  law 
of  inheritance  would  admit.  Any  hardship  of  this  kind 
could,  however,  generally  be  surmounted  by  the  simple 
expedient  of  gift  inter  vivos,  which,  besides,  in  most  cases, 
is  preferable  to  death-bed  charity  (Gladstone). 

This  last  consideration  leads  up  to  the  position  that 
it  is  useless  to  attempt  to  limit  too  severely  the  right  of 
bequest  in  the  supposed  interests  of  the  public.  Mill's 
idea  that  no  one  should  be  allowed  to  obtain  by  bequest 
or  inheritance  more  than  a  certain  minimum  (not  very 
high  even  in  the  case  of  children)  is  plainly  impracticable. 
It  would  be  defeated  either  by  open  gifts  during  life  or 
by  secret  trusts  —  a  device  that  has  often  been  resorted 
to  in  order  to  evade  unpopular  laws.  Here  again  we 
have  an  illustration  of  the  effectiveness  of  the  limitations 
imposed  on  the  theoretical  sovereign  power  by  the  actual 
will  of  the  subject.^ 

1  Compare  Mill,  Principles,  Book  II,  Chap.  II,  sees.  3  and  4 ;  Sidg- 
wick,  Folitics,  Chap.  VII ;  Maine,  Ancient  Law,  Chap.  VI  ;  Pollock 
and  Maitland,  History  of  English  Law,  Vol.  II,  Book  II,  Chap.  VI. 


CHAPTER   III 

PROPERTY  IN  LAND — EXPROPRIATION  —  COMPENSATION 

1.  Property  in  Land. — The  question  has  been  much 
discussed  whether  private  property  in  land  ought  to  be 
allowed.  On  the  matter  of  right,  it  is  said,  that,  since  land 
as  such  is  not  the  result  of  labour  or  of  saving,  it  is  on  a 
different  footing  from  other  forms  of  wealth.  For  the 
time  being  it  may  be  necessary  or  expedient  to  give  ex- 
clusive use,  but  this  need  not  involve  the  other  incidents 
and  privileges  of  private  property.  Under  primitive  con- 
ditions there  was  a  periodical  or  possibly  an  annual  divi- 
sion, and  in  Russia  and  in  India  a  large  part  of  the  land 
is  held  by  village  communities.  Even  in  the  most  ad- 
vanced societies,  it  is  maintained  that  the  state  or  local 
authorities  might  fulfil  the  functions  of  landlord  and 
take  the  rents.  But,  although  agricultural  land  in  its 
original  state  is  not  the  result  of  labour  and  capital, 
most  of  its  valuable  qualities  are  (Mill). 

It  is  best  to  consider  first  agricultural  land,  reserving, 
in  the  meantime,  the  case  of  building  land.  It  is  prob- 
able that  the  land  of  England,  as  it  exists  at  present,  owes 
most  of  its  valuable  qualities  to  the  cumulative  effects  of 
labour  and  capital,  e.g.  as  expended  on  drainage,  en- 
closures, roads,  and  good  tillage.  Thus,  so  far  as  these 
qualities  are  concerned,  land  (agricultural)  is  the  result 
of  labour  —  it  is  saved,  it  is  even  manufactured. 

112 


PROPERTY   IN   LAND  113 

Logically,  then,  land  may  be  said  to  consist  of  two 
parts,  namely,  natural  qualities  (incapable  of  improve- 
ment or  change),  and  capital  of  an  ordinary  kind  mixed 
up  with  them.  Mill  argues  that  so  far  as  these  primary 
qualities  are  concerned,  there  ought  not  to  be  private 
property,  but  there  might  be  in  the  case  of  the  secondary 
qualities  due  to  labour  and  capital.  Thus  he  says : 
"  Property  in  land  is  only  justifiable  so  long  as  the  owner 
is  the  improver ; "  and  "  Whenever  the  proprietor  ceases 
to  be  the  improver  political  economy  has  nothing  to  say 
in  defence  of  landed  property  as  there  established."  And 
again,  "In  no  sound  theory  should  the  landlord  be 
merely  a  since  urist  quartered  upon  the  land."  No  doubt 
IMill's  views  were  influenced  by  the  condition  of  Ireland 
when  he  wrote,  and  by  its  history ;  and  no  one  at  present 
would  defend  the  system,  the  evils  of  which  were  so  gross 
and  palpable.  It  is,  however,  always  dangerous  to  argue 
from  a  particular  case,  and  the  general  question  must  be 
considered  on  its  merits.  And  here  it  seems  enough  to 
state  that  on  all  forms  of  capital  interest  is  received,  and 
for  the  interest,  as  such,  the  owner  does  nothing  ;  take 
for  example,  the  interest  on  consols  or  railway  deben- 
tures, or  any  shares  from  which  the  element  of  risk  is 
eliminated,  and  in  which  the  shareholder  takes  no  part 
in  the  management.  Why,  then,  should  the  owner  of 
land  incur  particular  censure  because  he  ceases  to  be  the 
improver  ? 

There  are  certain  advantages  of  the  landlord  and  tenant 

system  as  it  prevails  in  England.     As  a  rule  competition 

will  insure  that  the  best  use  is  made  of  the  land  ;  a  good 

farmer  can  extend  his  holdings  by  renting  more  land  as 

z 


114  ELEMENTS  OF  POLITICAL   ECONOMY 

a  trader  may  borrow  more  capital;  the  farmer's  capital 
may  be  used  ou  the  land  instead  of  being  sunk  in  pur- 
chase ;  the  landlord  may  undertake  the  permanent  im- 
provements which  are  hardly  possible  without  ownership ; 
and  the  landowner  is  satisfied  with  a  small  return  in  the 
way  of  interest  on  the  value  of  the  land  as  a  whole,  on 
account  of  the  social  and  other  amenities  incident  on 
projDerty  in  land,  and  thus  the  farmer  gets  the  improve- 
ments cheap. 

No  doubt,  if  the  full  advantages  of  this  system  are  to 
be  obtained,  there  must  be  security  for  the  investment  of 
the  capital  of  the  tenant,  and  there  must  be  bona  fide 
competition  and  not  monopoly.  In  the  case  of  very  small 
holdings  it  is  possible  (as  Mill  forcibly  argues)  that 
special  legislation  may  be  desirable ;  but  tenant  farmers, 
farming  for  profit  on  a  relatively  large  scale  under  equit- 
able leases,  are,  as  a  rule,  quite  as  competent  as  any  land 
court  to  secure  fair  rents,  leases  of  suitable  length,  and 
compensation  for  their  improvements.  If  the  state  were 
to  become  the  universal  landlord,  it  would  be  compelled 
to  resort  to  routine  methods,  or  else  to  leave  the  powers 
at  present  exercised  by  the  private  owners  in  the  hands 
of  officials,  with  all  the  risks  of  caprice  or  jobbery. 

It  is,  however,  hardly  seriously  maintained  that  there 
would  be  any  gain  by  the  substitution  of  state  for  private 
management  of  land ;  as  a  rule,  those  who  advocate  what 
is  called  the  nationalisation  of  land  think  the  advantage 
is  to  be  found  in  the  financial  gain  that  would  accrue  to 
the  state.  And  this  naturally  leads  to  the  consideration  of 
the  principles  of  expropriation  and  compensation  in  general. 

2.    Expropriation.  —  The  right  of  expropriation  on  the 


PROPERTY  IN  LAND  115 

part  of  the  state  simply  means  that  any  government  can 
directly  or  indirectly  take  away,  limit,  restrict,  or  destroy 
any  proprietary  rights  of  individuals.  As,  for  example, 
it  may  abolish  some  forms  of  property  formerly  allowed, 
e.g.  slaves ;  restrictions  may  be  imposed  that  lessen  the 
value,  as  in  the  case  of  the  three  F's  in  Ireland  (fair  rents, 
fixity  of  tenure,  and  free  sale  of  tenant  right) ;  the  state 
may  make  any  changes  in  taxation,  which  changes 
directly  and  indirectly  deprive  people  of  their  property ; 
it  may  abolish  debts  under  certain  conditions,  e.g.  arrears 
of  rents  and  more  generally  the  debts  of  a  bankrupt ;  and 
finally,  the  state  may  transfer  any  form  of  property  from 
one  set  of  persons  to  another,  as  in  giving  compulsory 
powers  of  purchase  to  a  railway  or  to  some  local  authority. 
Furthermore,  it  may  be  easily  shown  that  in  the  course  of 
progress  frequent  occasions  are  sure  to  arise  when  it  will 
be  necessary  or  expedient  to  exercise  this  right  in  one  or 
other  of  its  forms. 

At  first  sight  it  might  appear  that  the  right  of  expro- 
priation is  part  of  the  idea  of  sovereignty,  and  thus  is 
subject  to  no  limitations.  As  already  explained,  how- 
ever, sovereignty  in  this  sense  is  a  purely  abstract  con- 
ception and  has  a  very  limited  range  in  economics.  As 
regards  expropriation,  governments  have  been  and  are 
limited  in  many  ways,  e.g.  in  the  United  States  by  the 
Constitution  (as  shown  in  the  case  of  the  proposed  in- 
come tax)  ;  and,  in  particular,  public  opinion  and  moral 
ideas  of  what  is  just  or  fair  render  it  necessary  for  the 
state  to  give  compensation.  This  right  to  compensation 
is  the  most  effective  limit  to  the  arbitrary  action  of  the 
state  and  is  of  the  greatest  economic  importance. 


116  ELEMENTS  OF  POLITICAL  ECONOMY 

3.  Compensation.  —  It  is  found,  however,  that  when 
expropriation  takes  place  (of  any  of  the  kinds  indicated) 
the  compensation  given  varies  indefinitely.  It  may  exceed 
the  market  value  (as  in  the  pretium  affectionis  approved 
of  by  Mill  in  the  case  of  land) ;  it  may  aim  at  being  just 
the  market  value,  as  in  goods  purchased  for  the  public 
service  (though  the  old  practice  of  preemption  on  the  part 
of  the  crown  was  only  gradually  annulled) ;  sometimes 
much  less  than  the  market  value  is  held  to  be  sufficient, 
e.g.  insanitary  dwellings ;  and  sometimes  no  compensation 
is  given,  as  when  arrears  of  rents  are  cancelled ;  and  some- 
times not  only  is  there  no  compensation,  but  a  further  loss 
is  involved  as  in  changes  of  taxation. 

The  degree  of  compensation  to  be  awarded  cannot  be 
decided  on  economic  grounds  only,  but  so  far  as  such 
grounds  are  valid  they  seem  to  be  reducible  to  two  general 
principles.  First,  the  state  must  avoid  any  shock  to 
security;  and  secondly/,  it  must  be  prepared  to  recognise 
expectations  sanctioned  by  public  opinion  in  the  interpre- 
tation of  contracts. 

Neither  of  these  principles  is  to  be  taken  as  implying  an 
absolute  command  or  imperative.  In  economies  there  are 
no  imperatives.  Bentham's  dread  of  insecurity  was  as 
intense  as  Mill's  of  over-population,  but  even  Benthara 
recognised  and  stated  that  sometimes  security  must  give 
place  to  security  —  a  shock  to  security  in  one  part  of  the 
body  economic  may  establish  more  firmly  the  security  of 
the  whole  system.-  Endless  examples  could  be  given  from 
economic  history.  One  of  the  best  instances  is  found  in 
the  gradual  mitigation  of  penalties  for  debt  and  in  the 
development  of  the  law  of  bankruptcy.     In  the  same  way 


PROPERTY  IN  LAND  117 

the  limitations  imposed  on  proprietary  rights  in  land  and 
capital  of  various  kinds,  which  have  been  found  necessary 
in  the  course  of  progress  to  prevent  or  remedy  certain 
abuses,  have  in  reality  strengthened  the  institution  of 
private  property.  Private  property  itself,  economically 
regarded,  is  only  a  means  to  an  end,  namely,  the  provi- 
sion of  economic  utilities  to  the  community  as  a  whole. 

Thus  it  is  quite  possible  that  the  compensation  given  on 
the  purely  economic  principle  of  security  might  be  less 
than  would  be  given  according  to  prevalent  custom  or 
actual  law,  and  the  question  arises  whether  the  actual 
practice  rests  on  some  deeper  moral  principle,  or  if  it  per- 
sists merely  through  the  unreasoning  force  of  habit,  in 
which  latter  case  it  must  in  time  give  way  to  economic 
considerations. 

Similarly,  as  regards  the  reasonable  expectations  implied 
in  certain  contracts,  no  hard  and  fast  rule  can  be  laid 
down.  The  important  object  from  the  economic  stand- 
point is  that  the  reality  and  efficiency  of  freedom  of 
contract  should  be  preserved.  And  again,  greater  free- 
dom on  the  whole  may  be  obtained  by  restrictions  in 
certain  directions,  and  the  reasonable  expectations  of  the 
community  may  be  set  against  the  particular  and  inter- 
ested expectations  of  individuals.  In  case  of  conflict  the 
best  means  of  reconciliation  often  consist  in  giving  a 
long  notice  that  certain  practices  will  no  longer  be  per- 
mitted. We  constantly  find  that  a  change  in  public 
opinion  foreshadows  legislation  which  will  restrict  pro- 
prietary rights ;  and  contracts  entered  into  with  the 
reasonable  prospect  of  such  reforms  being  made  ought  to 
provide  for  their  own  insurance. 


118  ELEMENTS  OF  POLITICAL  ECONOMY 

The  question  of  the  recognition  of  the  right  of  compen- 
sation would,  as  Mill  says,  in  many  cases  turn  on  what  in 
the  circumstances  was  sufficient  to  constitute  prescription, 
that  is  to  say,  not  on  strictly  legal,  but  on  moral  grounds. 
It  is  clear  that,  as  the  circumstances  change,  so  also 
does  the  moral  prescriptive  right  or,  what  for  the  present 
purpose  is  the  same  thing,  the  reasonable  economic 
expectation. 

At  the  same  time  a  change  in  public  opinion  in  itself 
does  not  justify  the  immediate  abolition  of  proprietary 
rights  without  compensation.  Action  of  this  kind  might 
not  only  injure  innocent  third  parties  (for  all  monetary 
contracts  are  far-reaching),  but  it  might  affect  adversely 
security  and  contract  in  the  society  as  a  whole,  and  thus 
the  state  would  lose  far  more  indirectly  by  refusing  com- 
pensation than  it  would  gain  directly. 

Similar  reasoning  may  be  applied  to  the  proposals  that 
involve  arbitrary  confiscation  of  property  in  the  disguise 
of  taxation. 

The  case  of  land  will  serve  to  illustrate  in  the  concrete 
the  general  principles  involved. 

Suppose  that  the  state  were  suddenly  to  destroy  private 
property  in  land  without  compensation  to  the  present 
owners.  The  land  itself  would  remain ;  and  also  its  pro- 
ductive power  in  agriculture  and  its  amenities  and  advan- 
tages for  building  would  be  unimpaired.  But  when  once 
it  is  remembered  that  contracts  based  on  the  private 
ownership  of  land  affect  every  part  of  the  industrial 
system  (^e.g.  through  banking  and  insurance  companies), 
it  is  plain  that  the  shock  to  security  and  to  freedom  of 
contract  would   involve  losses  to  the  community  far  in 


PROPERTY  IN  LAND  119 

excess  of  any  gain  to  the  state  through  the  confiscation. 
And  the  loss  on  balance  would  be  still  greater  if  an 
attempt  were  made  to  separate  what  were  called  above 
the  primary  and  the  secondary  qualities,  and  to  restrict 
the  confiscation  to  the  former. 

Nor  would  there  be  the  slightest  difference  in  the  real 
effects  if  the  confiscation  took  the  form  of  taxation  to  the 
full  extent  of  the  rental.  Taxation,  as  will  appear  later 
(see  Book  V),^  must  be  imposed  on  certain  principles,  e.g. 
equality,  certainty,  etc.,  and  as  proved  by  history  in  cases 
of  the  first  magnitude,  excessive  and  arbitrary  taxation 
may  suffice  to  destroy  the  economic  activities  of  a  nation.^ 

1  The  taxation  of  the  unearned  increments  of  building  land  is  ex- 
amined in  this  book. 

2  See  Sidgwick,  Politics,  Chap.  XII ;  also  Political  Economy,  Book  III, 
Chap.  IV,  §§  1,3,  14  ;  Mill,  Principles,  Book  II,  Chap.  II ;  Burke,  Sejlec- 
tions  on  the  French  Eevolution. 


CHAPTER  IV 

SOCIALISM 

1.    Historical  Variations  in  the  Institution  of  Property.  — 

People  who  have  become  accustomed  to  particular  laws 
and  institutions  are  apt  to  suppose  that  they  are  essential 
to  the  well-being,  if  not  to  the  very  existence,  of  society. 
Mill,  as  already  observed,  attempted  to  get  rid  of  this  idea 
by  appealing  to  the  conceptions  of  sovereignty  and  the 
indefinite  pliability  of  public  opinion.  A  more  effec- 
tive way  is  found  in  the  substitution  of  the  historical  for 
the  analytical  method.  The  appeal  to  history  shows  that 
in  the  past  societies  have  attained  a  high  degree  of  civili- 
sation under  laws,  customs,  and  institutions,  affecting  prop- 
erty and  the  distribution  of  wealth,  very  different  from 
those  that  prevail  at  present  in  England.  We  find,  for 
example,  the  various  forms  of  village  communities  and  of 
feudalism  appearing  all  the  world  over,  as  if  they  were  nec- 
essary stages  in  the  development  of  nations.  Each  of  these 
systems,  no  doubt,  had  its  abuses,  and  each  was  inimical 
to  certain  kinds  of  progress ;  but  in  idea,  apart  from  the 
abuses,  there  was  much  that  was  attractive  in  both  systems, 
and,  so  far  as  the  idea  was  realised,  security  and  the  essen- 
tial elements  of  social  order  were  attained.  History  also 
shows  that,  as  these  systems  decayed,  the  parts  that  sur- 
vived were  often  those  that  were  most  beneficial,  not  to 
the  nation  as  a  whole,  but  to  the  ruling  class  ;  thus  in  the 

120 


SOCIALISM  121 

great  enclosures  in  England  in  the  fifteenth  and  sixteenth 
centuries  the  ill-defined  customary  rights  of  the  villagers 
were  sacrificed  to  the  technical  legal  rights  of  the  lords 
of  the  manors. 

Again,  the  feudal  privileges  enjoyed  by  the  so-called 
owners  of  land  survived  the  obligations  incident  on  feudal 
tenures,  and  to  this  day  dealings  in  land  are  hampered  by 
survivals  of  feudal  law. 

The  results  of  the  appeal  to  history  are  confirmed  by 
the  survey  of  existing  conditions  and  recent  changes. 
The  elements  of  economic  well-being  may  be  secured  under 
very  different  systems,  and  when  a  revolution  of  system 
is  effected,  it  may  benefit  a  class  more  than  a  people. 

In  England,  and  generally  in  the  industrial  nations  of 
the  West,  the  course  of  reform  as  regards  property  con- 
sisted mainly  in  the  abolition  of  useless  or  harmful  sur- 
vivals which  had  been  retained  partly  through  the  vis 
inertice  of  mere  habit  and  partly  through  the  active  sup- 
port, when  threatened,  of  interested  classes.  At  the  same 
time  there  were  always  reformers  who  wished  to  go  much 
further,  and  to  introduce  revolutionary^  changes  in  the 
laws  affecting  property  and  tlie  distribution  of  wealth. 
Some  of  these  reformers  seemed  to  think  that  their  object 
would  be  best  achieved  by  adapting  the  old  ideas  to  the 
new  conditions.  Thus  some  looked  to  modernised  and 
purified  communities  as  the  ideal,  others  to  a  modernised 
feudalism  in  wliich  the  king,  for  example,  would  be  the 
first  industrial,  and  the  captains  of  industry  take  the 
place  of  the  feudal  barons.  The  phalansteries  of  Fourier 
and  the  chefs  industriels  of  St.  Simon  are  the  best-known 
types  respectively  of  these  ideas. 


122  ELEMENTS  OF  POLITICAL  ECONOMY 

Besides  these,  however,  all  sorts  of  schemes  were  pro- 
posed which  involved  revolutionary  changes  in  the  exist- 
ing systems  of  property  and  distribution.  And  at  the 
present  time  new  schemes  are  constantly  being  put  for- 
ward with  the  immediate  or  ultimate  object  of  effecting 
a  social  revolution.  All  these  schemes  may  be  embraced 
under  the  comprehensive  name  of  Socialism,  though  each 
of  them  is  apt  to  arrogate  to  itself  alone  the  pleasing  but 
exclusive  attribute  —  "  the  true." 

Whether  we  apply  the  analytical  or  the  historical 
method,  it  may  be  admitted  of  all  these  schemes  that 
they  are  theoretically  possible ;  there  is  nothing  immutable 
about  the  present  laws  of  distribution ;  whether  socialism 
in  any  of  its  forms  would  be  desirable  or  practicable  is 
a  different  thing. 

2.  Definition  of  Socialism.  —  In  a  recent  work  on  social- 
ism, it  is  said  that  "  no  definition  of  socialism,  at  once 
true  and  precise,  has  ever  been  given  or  ever  will  be 
given"  (Flint).  The  opinion  is  supported  in  the  con- 
crete by  the  critique  of  many  attempts  at  definition,  and 
in  the  abstract  by  the  argument  that  "socialism  is  essen- 
tially indefinite  and  indeterminate ;  it  is  a  tendency  or 
movement  towards  an  extreme;  it  may  be  very  great  or 
very  small;  it  may  manifest  itself  in  the  most  divers 
social  and  historical  connections;  it  may  assume  and  it 
has  assumed  a  multitude  of  forms."  Economists,  how- 
ever, are  constantly  beset  with  similar  difficulties  of 
definition ;  they  are  always  dealing  with  tendencies,  con- 
tinuities, and  debatable  margins,  and  economic  ideas 
assume  an  indefinite  variety  of  forms  in  particular  in- 
stances, e.g.  capital,  labour,  etc. 


d 


SOCIALISM  123 

The  following  definition  seems  to  cover  most  of  the 
forms  of  socialism,  omits  none  of  importance,  and  effec- 
tively contrasts  socialism  with  the  present  system  of 
individualism :  "  Socialism  in  the  generic  sense  of  the 
term,  embraces  all  such  schemes  as  are  intended  to  further 
the  claims  of  society  for  social  purposes  as  against  the 
present  system  of  individualism  ;  or  to  promote  the  in- 
terests of  the  whole  as  against  those  of  particular  classes 
and  individuals ;  the  object  of  all  such  schemes  being 
directly  or  indirectly  revolutionary  as  distinct  from  mere 
reforms  of  the  present  system."  In  brief,  the  essence  of 
socialism  is,  positively  to  promote  the  good  of  the  whole 
society ;  and  negatively,  to  destroy  the  present  system 
(individualism)  which  generates  or  permits  the  injurious 
privileges  of  classes  and  individuals.  Accordingly,  just 
as  socialists  are  critics  of  individualists,  so  they  in  turn 
are  critics  of  socialists  as  regards  wages,  capital,  property, 
interest,  etc.  And  in  a  sense,  the  whole  of  political 
economy,  when  treated  from  the  standpoint  of  the  present 
system,  is  a  critique  of  socialism.  In  this  wide  meaning, 
socialism  has  a  vast  literature,  and  the  first  requisite  is  to 
give  some  kind  of  classification  of  the  varied  schemes. 

3.  Classification  of  Socialistic  Schemes.  —  In  classifying 
the  different  schemes,  we  may  take  as  the  guiding  prin- 
ciple the  amount  and  degree  of  state  interference  that 
would  be  required  as  compared  with  the  present  system. 
With  this  leading  idea  we  have :  — 

(1)  Schemes  that  would  involve  less  state  control 
than  at  present.  Of  this  kind  were  the  schemes  that 
sprang  from  the  ideal  of  liberty  of  the  French  Revolution. 
It  was  supposed  that  social  evils  were,  for  the  most  part, 


124  ELEMENTS  OF  POLITICAL  ECONOMY 

the  results  of  the  interferences  of  governments  with  the 
course  of  nature.  Hence,  in  the  extreme  form,  these 
schemes  seek  to  destroy  governments  and  restore  natural 
conditions.  Modern  instances  of  this  idea  are  found  in 
anarchism  and  nihilism.  It  is  not  necessary,  however, 
that,  in  order  to  promote  this  idea,  resort  should  be  made 
to  violence;  in  England,  for  example,  Godwin  relied 
entirely  on  education  and  the  power  of  opinion,  though 
he  hoped  for  the  perfectibility  of  man  with  a  minimum 
of  legislative  control. 

(2)  Next,  there  are  the  schemes  that  propose  to  estab- 
lish witJmi  the  existing  state  a  number  of  separate  socialistic 
bodies  or  communities.  These  would  only  require  suffer- 
ance from  the  existing  authorities.  A  number  of  experi- 
ments of  this  kind  were  made  in  America  (e.g.  Brook 
Farm).  The  names  of  Fourier  and  Robert  Owen  are 
best  known  in  connection  with  this  idea  of  socialism. 

Schemes  of  profit-sharing,  cooperation,  and  industrial 
partnership  do  not  come  under  the  definition,  as  they 
are  essentially  only  modifications  of  the  present  system. 
Strictly  speaking,  these  socialistic  communities  within  the 
state  might  also  be  excluded  on  the  ground  that  they  do 
not  promote  the  good  of  the  whole  society,  but  only  that 
of  their  members.  But  in  intention,  at  any  rate,  they  are 
designed  to  leaven  the  whole  lump. 

(3)  There  are  the  schemes  that  involve  a  greater  degree 
of  state  control  both  in  legislation  and  in  administration. 
In  the  extreme  form  we  have  collectivism  or  state  social- 
ism. The  writer  most  referred  to  in  this  connection  is 
Karl  Marx,  though  he  has  derived  many  of  his  leading 
ideas  from  the  early  English  socialists  (Foxwell's  Intro- 


SOCIALISM  126 

ductiontoMenger).  Some  collectivists  approve  of  effect- 
ing the  revolution  by  force ;  others  seek  within  the  limits 
of  the  present  law  to  permeate  society  with  socialistic 
ideas  and  gradually  to  socialise  our  institutions.  To  begin 
with,  no  doubt,  writers  of  this  school  are  only  advanced 
reformers,  but  they  are  properly  classed  as  socialists 
because  their  ultimate  object  is  a  social  revolution. 

It  is  sometimes  said  that  the  poor  laws,  factory  acts, 
free  education,  etc.,  are  socialistic  in  tendency,  and  the 
old  phrase  has  been  revived:  "We  are  all,  then,  social- 
ists." But  such  a  large  use  of  the  term  would  take  away 
all  definiteness  from  the  meaning,  as  the  writers  who  are 
recognised  as  the  strongest  supporters  of  individualism 
may  also  approve  of  the  legislation  just  cited.  All  econ- 
omists, from  Adam  Smith,  have  admitted  that  abuses 
might  arise  under  the  present  system  which  would  call 
for  governmental  intervention,  and  also  that  certain  indus- 
trial functions  ought  to  be  performed  by  the  state.  (See 
below,  Book  V.) 

4.  State  Socialism  or  Collectivism.  —  The  form  of  social- 
ism that  at  present  is  most  in  favour  is  state  socialism  or 
collectivism,  and  a  more  detailed  account  may  be  attempted 
of  the  features,  or  rather  tendencies,  of  this  system.  It  is, 
however,  difficult  to  form  an  adequate  notion  even  of  the 
tendencies  involved,  on  account  of  the  very  different  pro- 
posals that  have  been  described  under  the  expression 
state  socialism.  For  the  present  purpose  it  seems  best 
to  take  the  system  in  an  extreme  or  ideal  form,  so  as  to 
bring  out  the  leading  ideas  in  sharp  contrast  to  the  present 
system.  From  this  standpoint  the  ideal  aimed  at  may 
be  described  as  the  substitution  of  collective  for  private 


126  ELEMENTS  OF  POLITICAL  ECONOMY 

ownership  and  management  of  the  means  of  production 
(land  and  capital),  and  the  displacement  of  competition 
by  organisation  under  state  control. 

Under  the  present  system,  indeed,  capital  is  often  col- 
lected in  large  masses,  and  there  is  also,  to  a  great  extent, 
organisation  of  labour.  But  aggregation  and  organisation 
of  this  kind  are  the  effects  of  the  voluntary  actions  of 
individuals,  —  voluntary,  that  is  to  say,  in  the  sense  that 
they  are  not  due  to  the  initiative  or  direction  of  the  state. 

If,  now,  we  seek  to  carry  to  its  logical  conclusions  the 
proposal  that  the  state  should  control  and  organise  pro- 
duction, the  first  result  is  that  there  would  be  involved  a 
similar  control  of  distribution.  If  the  state  assigns  the 
tasks,  the  state  also  must  assign  the  corresponding  rewards. 
Accordingly,  obedience  to  authority  must  take  the  place 
of  freedom  of  contract.  The  next  logical  result  would 
seem  to  be  that  the  state  (through  its  official  statisticians) 
must  estimate  the  needs  or  the  deserts  of  consumers. 
That  is  to  say,  instead  of  demand  being  estimated  by 
retail  and  wholesale  traders  it  must  be  estimated  by 
authority  in  some  form.  This  again  would  naturally  lead 
to  the  abolition  of  trade  and  exchange.  And,  finally,  with 
the  abolition  of  exchange,  the  mechanism  of  exchange 
would  no  longer  be  required,  and  thus  money,  also,  would 
disappear. 

Extravagant  as  this  conclusion  may  seem  to  be,  it  is 
only  the  logical  sequence  of  the  fundamental  idea  of  col- 
lectivism. And  it  is  worthy  of  attention  on  two  grounds. 
In  the  first  place,  the  supporters  of  the  present  system 
maintain  that  it  is  the  result  of  a  long  process  of  evolu- 
tion in  which  the  substitution  of  a  money  economy  for  a 


SOCIALISM  127 

natural  economy  lias  played  the  most  important  part. 
The  extension  of  the  use  of  money  is,  in  this  view,  the 
economic  form  of  progress  from  status  to  contract.  Of 
course  under  the  use  of  money  must  be  included  the  use 
of  what  is  called  representative  money,  or  generally  the 
development  of  banking  and  credit. 

Secondly,  it  may  be  observed  that  many  socialists 
(notably  Marx)  ascribe  a  large  part  of  the  abuses  of 
the  present  system  to  the  use  of  money;  it  is  money 
that  conceals  the  exploitation  of  labour  by  capital.  And 
actually  in  the  nineteenth  century  several  crude  attempts 
were  made  to  substitute  for  money  some  kind  of  labour 
exchanges.  Thus  at  any  rate  it  may  be  said  that  the 
individualist  emphasises  the  advantages  of  a  money 
economy;  the  socialist,  its  disadvantages  and  abuses. 

Some  of  the  abuses  and  unjust  inequalities  of  the 
present  system  are  ascribed  to  the  cumulative  effects 
of  the  institutions  of  inheritance  and  bequest,  which  per- 
petuate the  injustice  of  the  past.  And  accordingly  the 
abolition  or  serious  modification  of  the  laws  of  succession 
is  generally  part  of  the  extreme  socialist  programme.  But 
altogether  apart  from  this  historical  source  of  injustice  it 
is  maintained  that  the  system  of  capitalistic  production 
under  present  conditions  is  productive  of  a  continuous 
exploitation  or  robbery  of  labour.  A  redistribution  of 
wealth  would  effect  no  radical  or  permanent  cure  of  the 
social  disorder  —  it  is  the  system  that  is  at  fault.  It  was 
supposed  that  this  conclusion  (the  continuous  robbery 
of  labour  by  capital)  was  the  logical  deduction  from  the 
analysis,  by  Ricardo  and  the  so-called  orthodox  economists, 
of  the  system  of  production  under  the  control  of  private 


128  ELEMENTS   OF  POLITICAL  ECONOMY 

capitals.  The  natural  tendency  of  wages  (owing  partly 
to  the  imprudent  increase  of  population  and  partly  to  the 
greater  bargaining  power  of  capital)  was  to  fall  to  a 
bare  subsistence  minimum  —  the  celebrated  iron  (eherne,  lit. 
brazen)  law  of  wages ;  whilst  surplus  profits  necessarily 
tended  to  increase  indefinitely,  and  in  particular  the  rents 
of  lands  tended  to  rise  through  the  very  causes  that 
depressed  the  wages  of  labour.  It  was  further  supposed 
that  in  the  course  of  the  natural  development  of  this 
capitalistic  system  the  larger  capitals  would  in  time 
swallow  up  the  smaller.  Ultimately,  then,  the  result 
of  this  evolution  would  be  the  division  of  society  into 
two  classes,  a  very  small  class  of  very  rich  and  an 
enormous  class  of  very  poor  —  the  millionaires  on  one 
side  and  the  proletariat  on  the  other.  The  evolutionary 
socialists,  as  they  call  themselves  (though,  curiously 
enough,  Herbert  Spencer  is  an  extreme  individualist), 
think  that  when  this  stage  has  been  reached  or  is  in  sight 
the  state  must  intervene  and  take  over  the  large  capitals, 
and  that,  owing  to  their  magnitude  and  methods,  the  task 
will  be  easy. 

Such,  then,  being  the  origins,  the  leading  ideas,  and 
logical  consequences  of  state  socialism  in  its  extreme 
form,  they  may  now  be  examined  from  different  points  of 
view.  And,  first,  is  this  indictment  of  the  present  system 
justified  ? 

5.  The  Socialist  Critique  of  Individualism.  —  In  the 
first  place,  it  must  be  pointed  out  that  every  economist 
admits  that  in  the  present  system  there  are  very  great 
social  evils,  e.g.  pauperism,  overcrowding,  insanitary 
dwellings,  and  generally  amongst  the  poorest  such  con- 


SOCIALISM  129 

ditions  of  livelihood  and  living  as  are  destructive  of  all 
that  is  good  in  human  life.  And  at  the  other  end  of  the 
social  scale  (as  measured  by  the  possession  of  wealth) 
there  are  the  evils  connected  with  monopolies,  the  pro- 
motion of  unsound  companies,  speculation,  gigantic  frauds, 
commercial  crises,  etc.,  and  also  all  the  evils  that  arise 
from  misdirected  or  extravagant  or  immoral  expenditure 
on  the  part  of  the  very  rich.  These  abuses  are  admitted 
by  all  observers.  The  conflict  of  opinion  arises,  first,  on 
the  extent  and  the  degree  of  the  evils,  and  secondly,  on 
the  causes.  And  it  may  be  said  at  once  that  the  questions 
involved  can  only  be  fully  answered  by  inquiries  that 
imply  a  reference  to  every  part  of  economic  science.  In 
this  place  it  must  suffice  to  bring  forward  a  few  salient 
points  for  consideration. 

The  "  iron  "  law  of  wages  is  not  now  accepted  by  any 
economist,  even  as  a  first  approximation  to  the  theory  of 
wages.  The  larger  part  of  gross  profits  is  not  mere  interest 
obtained  through  the  otiose  ownership  of  capital,  but  is 
the  result  of  enterprise  and  ability  which,  by  the  econo- 
mies and  improvements  introduced,  benefit  society  to  a 
still  greater  extent,  e.g.  the  profits  obtained  from  the 
development  of  the  means  of  transport  and  communication 
in  the  last  century  were  small  relatively  to  the  advantages 
obtained  by  the  nation  or  the  world.  Pauperism  has  many 
causes,  and  it  is  doubtful  if  the  system  of  large  capitals 
can  be  considered  in  itself  as  one  of  them  (small  hold- 
ings of  land  and  the  so-called  domestic  manufactures,  as 
experience  shows,  may  be  at  least  associated  with  pau- 
perism). There  are  counteracting  causes  to  the  amalgama- 
tion of  capital  (as  already  explained).     The  professional 


130  ELEMENTS  OF  POLITICAL  ECONOMY 

classes,  whose  only  capital  is  their  skill,  in  many  cases 
obtain  higher  "  wages "  than  the  employers  of  labour ; 
manual  labour  is  only  one  form  of  labour,  and  between 
the  lowest  and  the  highest  forma  of  labour  (in  the  ex- 
tended economic  sense)  there  are  endless  gradations. 
Production  on  a  large  scale  can  only  exist  with  large 
markets,  which  implies  large  demand,  which  again  means 
a  multitude  of  consumers  —  this  applies  to  every  kind  of 
production  in  the  widest  sense  of  the  term ;  railways  and 
ships  can  only  grow  by  an  increase  of  traffic,  and  as 
regards  passengers  it  is  the  masses  that  pay  best.  There 
has  been  during  the  nineteenth  century  in  the  great 
industrial  countries  a  rise  in  money  wages  and  a  still 
greater  rise  in  real  wages,  and  a  fall  in  interest  as  such ; 
and  on  the  whole  the  condition  of  the  masses  of  the 
people,  in  whatever  way  tested,  has  immensely  improved. 
Thus  it  appears  that  the  socialist  critique  of  the  present 
system,  in  the  extreme  form  which  regards  the  rich  as  the 
parasites  of  the  poor  and  large  (private)  capitals  as 
the  root  of  all  evil,  is  not  supported  by  the  first  siftings 
of  economic  inquiry. 

It  remains  to  notice  briefly  the  difficulties  of  the  remedy 
proposed,  namely,  the  collective  ownership  of  capital. 

6.  Difficulties  of  Socialism. —  Certain  difficulties  that 
are  common  to  all  forms  of  socialism  may  be  noticed  very 
briefly,  as  they  are  part  of  the  common  thought  of  the  day. 
As  regards  the  demand  for  commodities  (in  the  broad 
sense)  there  would  be  a  difficulty  in  the  distribution  of 
the  things  that  are  limited  in  quantity  and  of  varying 
degrees  of  quality,  e.g.  the  best  sites  for  houses,  the  most 
pleasing  parts  of   the   country  for   occupations,  etc.     In 


SOCIALISM  131 

general,  however,  the  difficulties  of  consumption  might 
be  met  partly  through  the  extension  of  the  public  means 
of  enjoyment,  e.g.  gardens,  theatres,  etc.,  and  partly  by 
official  estimates  of  the  natural  demand  for  various  things, 
and  the  adoption  of  some  scale  of  relative  utilities  that 
would  command  general  acceptance;  in  the  ancient 
village  communities  the  appeal  to  chance  {e.g.  lots)  was 
often  resorted  to,  and  in  all  times  the  judgments  of  chance 
have  been  popular.  There  was  also  the  method  of  peri- 
odical division.  An  official  average  estimate  might  easily 
be  made  of  the  things  that  can  be  produced  in  practically 
unlimited  quantities,  freedom  of  choice  in  the  ratios  of 
the  public  utility  scale  being  left  to  individuals.  The 
real  difficulty  of  consumption  arises  in  connection  with 
distribution.     (See  below.) 

Given  the  estimated  demand,  or  what  the  state  in  its 
wisdom  considers  a  fair  allowance  of  all  sorts  of  things, 
the  next  question  is :  how  are  these  things  to  be  pro- 
duced? Here  the  difficulties  are  more  serious.  Such 
are:  as  regards  the  choice  of  employment  or  occupation, 
and  the  apportionment  of  work,  the  alternatives  would  be 
authority  with  quasi-military  power  or  a  system  of  extra 
rewards  in  proportion  to  the  hardship  etc.,  of  the  work, 
or  it  may  be  the  ability  of  the  worker.  In  any  case  it 
would  be  difficult  to  give  equal  opportunities  to  each,  and 
to  exact  equal  quantities  of  labour.  Other  difficulties  in 
connection  with  production  are  found  in  the  motives  that 
will  induce  the  people  to  work  in  the  new  order  of  things. 
Self-interest  would  not  operate  to  the  same  extent;  but 
on  the  other  hand  it  might  be  expected  that  there  would 
be  an  increase  of  public  spirit  and  esprit  de  corps  (Mill). 


132  ELEMENTS  OF  POLITICAL  ECONOMY 

The  conditions  of  labour  would  also  be  much  improved, 
and  the  idea  that  labour  was  something  to  be  shirked 
would,  it  might  be  hoped,  disappear.  On  this  point  it 
may  be  noted  that,  under  the  present  system,  the  self- 
interest  of  the  workers  is  only  remotely  aroused  in  the 
case  of  time  wages,  and  also  that  a  good  workman  all  the 
world  over  takes  a  pride  in  good  work.  The  disutility 
of  work  in  itself  has  been  ridiculously  exaggerated. 
Given  reasonable  hours,  healthy  conditions,  and  above  all 
contentment  with  the  reward,  and  in  most  cases  the  work 
itself  ought  to  rank  as  a  pleasure. 

The  word  contentment  naturally  leads  to  the  difficul- 
ties of  distribution. 

On  what  principles  are  the  various  forms  of  wealth  — 
material  and  immaterial  —  to  be  distributed?  Apart  from 
the  forms  of  public  or  social  wealth  open  to  all,  how 
much  of  general  purchasing  or  controlling  power  is  to  be 
given  to  each?  If  money  is  retained  in  the  socialist 
state,  how  are  the  rates  of  money  wages  to  be  deter- 
mined when  competition  is  excluded  ?  As  Mill  observes, 
absolute  equality  (communism  in  his  sense)  might  be 
accepted,  so  might  chance  (the  spirit  of  gambling  is  uni- 
versal), but  not  authority.  The  really  weak  point  of 
most  socialist  schemes  is  in  the  excessive  wisdom  they 
require  on  the  part  of  the  necessary  officials,  and  the 
excessive  appreciation  of  the  wisdom  of  the  controlling 
powers  on  the  part  of  those  controlled.  To  all  these 
familiar  objections  (and  others  might  be  added,  e.g.  the 
dangers  of  overpopulation,  the  difficulties  of  foreign 
trade,  etc.)  it  is  replied  that  the  socialist  state  would 
only  be  gradually  evolved,  and  that  in  the  meantime,  the 


SOCIALISM  133 

object  ought  to  be  to  socialise  our  institutions.  Ap- 
parently it  is  thought  that  the  process  might  be  stayed  as 
soon  as  signs  of  failure  appear.  The  difficulty  of  dealing 
with  socialism  in  this  form  is  that  in  the  earlier  stages 
there  is  nothing  to  distinguish  it  from  reform  of  the 
present  system.  The  only  real  distinction  seems  to  be 
that  the  socialists  would  approve  of  the  extension  of  gov- 
ernmental functions  (central  or  municipal)  partly  on 
account  of  the  educative  effect  on  public  opinion,  or  with 
the  very  idea  of  inducing  people  to  rely  on  the  state, 
instead  of  relying  on  themselves.  The  opposition  of 
ideas  is  thus  marked  even  when  the  same  immediate 
object  is  approved,  both  by  the  individualist  and  the 
socialist. 

The  conflict  between  the  two  ideals  from  this  point  of 
view  involves  a  consideration  of  the  advantages  and  the 
limitations  of  governmental  action  in  general  —  a  topic 
that  is  so  large  as  to  require  separate  treatment  (see 
below,  Book  V).  Here  it  may  suffice  to  say  that  in  deal- 
ing with  any  case  for  governmental  action  (under  present 
conditions)  we  have  to  answer  two  questions.  First,  Is 
the  evil  or  defect  complained  of  incapable  of  remedy  by 
the  free  action  of  individuals?  Is  there  o,  prima  facie 
case  for  the  interference,  or  at  least  for  the  deliberation,  of 
government?  And  secondly.  Can  the  government  pro- 
vide a  remedy?  Economic  history  is  full  of  examples  in 
which  the  remedy  attempted  by  the  state  has  only  aggra- 
vated the  disease,  although  at  the  same  time  there  are 
examples,  also  on  the  largest  scale,  which  show  that  the 
intervention  of  the  state  was  too  long  deferred,  and  in 
the  end  was  most  beneficial  (e.g.  the  factory  legislation). 


134  ELEMENTS  OF  POLITICAL  ECONOMY 

7.  The  Benefits  of  Socialist  Ideals.  —  It  is  only  fair,  in 
conclusion,  to  notice  briefly  some  of  the  benefits  that  may 
be  fairly  ascribed  to  the  writings  and  the  practical  efforts 
of  socialists.  And  first,  as  regards  the  development  of 
economic  theory,  they  may  claim  to  have  contributed 
greatly  to  the  analysis  of  capital  and  labour.  In  some 
directions  they  pushed  tlieir  conclusions  too  far,  but  they 
did  much  to  restore  to  its  proper  place  the  human  element 
in  the  production  and  the  distribution  of  wealth.  They 
realised  that  in  production,  against  the  cheapness  of  the 
product  we  must  set  the  real  cost  in  labour.  It  is  impos- 
sible to  exaggerate  the  horrible  degradation  of  labour,  in 
many  industries  on  a  large  scale,  after  the  industrial  revo- 
lution. There  is  a  foolish  idea  that  examples  that  are 
notorious  lose  efficacy  in  proportion  to  the  familiarity. 
The  lessons  of  the  horrors  of  child  labour  in  the  early 
part  of  the  nineteenth  century  ought  never  to  be  for- 
gotten or  be  dulled  by  familiarity.  The  socialists  through 
their  ideas  promoted  the  legislation  that  remedied  this 
and  other  evil  conditions  of  labour.  There  were  no  doubt 
other  influences  (religious  and  moral),  but  the  socialist 
analysis  played  an  important  part.  Secondly,  the  social- 
ists may  claim  a  share  in  restoring  to  its  proper  place,  in 
the  national  economy,  the  industrial  functions  of  the 
state.  Adam  Smith,  himself,  it  is  true,  had  assigned  to 
governments  tasks  enough  to  occupy  all  their  energies ; 
but  his  attacks  on  the  abuses  of  state  management  had 
been  so  strong  and  so  successful,  that  a  species  of  laissez 
/aire  had  become  popular,  which,  if  carried  to  its  logical 
conclusion,  would  have  reduced  society  to  a  state  of 
nature  (in  the  modern  and  historical  sense  of  a  state  of 


I 


SOCIALISM  135 

savagedom).  The  socialists  did  much  to  get  rid  of  the 
excesses  of  laissez  faire,  both  in  theory  and  in  practice- 
Finally,  the  socialists  emphasised  the  importance  of  pub- 
lic spirit  and  of  solidarity,  which  had  been  underestimated 
in  the  stress  laid  on  the  benefits  of  individual  freedom.^ 

1  The  corresponding  chapter  in  the  Priticiples,  Book  II,  Chap.  XV, 
is  written  from  a  different  standpoint.  The  literature  of  socialism  and 
the  allied  topics  is  so  vast,  that  a  short  selection  of  works  is  difficult. 
Kirkup,  History  of  Socialism;  Graham,  Socialism  New  and  Old; 
Rae,  Contemporary  Socialism  ;  Conner,  The  Socialist  State  ;  Ely,  French 
and  German  Socialism;  Karl  Marx,  Capital;  Seligman,  Economic 
Interpretation  of  History ;  Schaffle,  Quintessence  of  Socialism  ;  Holyoake, 
History  of  Cooperation  (Vol.  I)  ;  Flint,  Socialism;  Nicholson,  His- 
torical Progress  and  Ideal  Socialisin ;  Menger,  Bight  to  the  Whole 
Produce  of  Labour  (especially  Foxwell's  Introduction  on  the  Early  Eng- 
lish Socialists) ;  and  the  publications  of  the  Fabian  Society;  Macrosty's 
Trusts  and  the  State,  and  Webb's  Industrial  Democracy  have  an  in- 
direct bearing  on  socialism. 


CHAPTER  V 

QUANTITATIVE    DISTRIBUTION 

1.  Of  the  Quantitative  Distribution  of  Property.  —  In  the 

preceding  chapters  of  this  book  we  have  been  occupied 
mainly  with  qualitative  distinctions.  We  have  com- 
pared the  general  characteristics  of  production  and  dis- 
tribution ;  we  have  considered  the  economic  bases  of 
private  property;  we  have  examined  the  nature  of  the 
laws  of  inheritance  and  bequest,  or  the  modes  in  which 
property  is  allowed  to  pass  from  the  dead  to  the  living ; 
and  by  way  of  interlude  we  have  looked  at  the  features 
of  some  of  the  ideals  which  have  been  set  up  in  the 
hope  of  revolutionising  these  proprietary  ideas  and 
institutions. 

Resuming  now  the  main  argument,  the  next  problem 
or  set  of  problems  is  to  determine  the  causes  that  affect 
the  quantitative  distribution :  first,  of  the  agents  of 
production  themselves,  and  secondly,  of  the  produce  of 
those  agents. 

In  both  cases  when  we  make  a  general  survey  we  may 
distinguish  between  two  sets  of  causes :  first,  those 
that  are  embraced  under  law  and  custom  in  the  widest 
sense  of  the  terms,  and  secondly,  those  that  come  under 
freedom  of  contract  and  competition,  these  terms  also 
being  taken  in  a  large  sense. 

136 


QUANTITATIVE   DISTRIBUTION  137 

2.  The  Distribution  of  the  Agents  of  Production  as  deter- 
mined by  Law  and  Custom.  —  The  actual  distribution 
of  land,  even  at  the  present  time,  in  old  countries 
depends  largely  on  law  and  custom.  According  to  a 
recent  calculation  two-thirds  of  the  whole  of  England 
and  Wales  are  owned  by  10,207  persons,  two-thirds  of 
Ireland  by  1942  persons,  and  two-thirds  of  Scotland  by 
330  persons.  Twelve  owners  have  a  quarter  of  Scot- 
land, and  nine-tenths  of  the  whole  of  Scotland  belongs 
to  fewer  than  1700  people. 

In  France,  on  the  other  hand,  50,000  proprietors 
possess  each  an  average  of  750  acres,  500,000  an  average 
of  75  acres ;  and  5,000,000  an  average  of  7|  acres. 
There  are  in  France  1,000,000  self-sufficing  freeholds 
supporting  1,000,000  families  without  the  need  of  earn- 
ing wages.  In  Great  Britain,  so  late  as  the  nineteenth 
century,  the  large  estates  swallowed  up  a  large  number 
of  the  small  properties  of  "  statesmen "  and  yeomen. 
There  can  be  little  doubt  that  this  great  difference  in 
the  distribution  of  property  in  land  is  to  be  ascribed 
principally  to  differences  in  the  laws  and  customs  that 
have  prevailed  and  still  prevail  in  the  two  countries. 
In  England,  strictly  speaking,  the  customs  have  had 
greater  influence  than  the  laws ;  in  other  words,  the 
laws  that  have  prevented  the  splitting  up  of  the  large 
estates  in  Britain  are  in  the  main  permissive ;  the  prac- 
tice of  family  settlements  has  probably  had  most  in- 
fluence. In  B^'rance,  on  the  other  hand,  the  rule  of 
compulsory  and  equal  inheritance  has  had  considerable 
effect. 

The  actual  quantitative  distribution  of  capital  depends 


138  ELEMENTS  OF  POLITICAL  ECONOMY 

to  a  much  less  extent  than  land  on  law  and  custom. 
Their  influence,  however,  is  still  great  even  in  those 
countries  in  which  freedom  of  contract  is  developed  to 
the  greatest  degree,  e.g.  inequalities  of  fortunes  are  at 
any  rate  continued  by  the  laws  and  customs  affecting 
successions.  But,  in  origin,  the  accumulation  of  capital 
in  the  hands  of  individuals  is  for  the  most  part  the  effect 
of  a  series  of  contracts.  It  is  doubtful  if  the  direct 
operation  of  law  could  even  restrict  this  concentration 
of  capital  so  long  as  the  principle  of  freedom  of  contract 
is  left  as  the  basis  of  the  industrial  system.  More  and 
more,  with  the  progress  of  society,  capital  is  distributed 
by  monetary  influences.  And  money  is  essentially  mobile. 
The  growth  of  the  money  power  is  best  seen  in  the  case 
of  capital.  As  the  history  of  the  usury  laws  shows,  the 
money  economy,  even  in  its  most  rudimentary  forms, 
eluded  the  edicts  of  law  and  the  dictates  of  religion ;  and 
with  the  development  of  banking  and  credit  the  freedom 
of  money  has  increased.  In  economic  analysis  it  is,  no 
doubt,  still  important  for  many  purposes  to  distinguish 
between  the  actual  forms  of  material  capital,  and  their 
money  measures ;  but  as  regards  both  revenue-capital  and 
production-capital,  it  may  be  said  that  the  money  value 
is  essential  to  their  existence.  Machinery  that  loses  its 
money  value  can  no  longer  be  ranked  as  fixed  capital; 
similarly,  if  the  revenue,  reckoned  in  money,  from  any 
source  ceases,  the  source  is  no  longer  capital.  Even  the 
quasi-permanent  forms  of  consumption-capital  (in  the 
sense  defined)  are  generally  alloAved  to  decay  if  their 
comparative  money  value  dwindles. 

In  the  case  of  labour,  that  is  to  say  as  regards  owner- 


QUANTITATIVE   DISTRIBUTION  139 

ship,  the  direct  influence  of  law  is  least  of  all  under 
present  conditions  in  the  great  industrial  countries. 
Slavery  in  all  forms  has  been  abolished.  Man,  from 
being  the  chief  form  of  property  (Aristotle),  has  ceased 
to  be  property.  Thus  the  laws  of  succession  have  here 
no  place.  So  long  as  slavery  existed,  the  distribution  of 
slaves  was  of  the  utmost  importance,  and  the  various 
degrees  of  serfdom  were  only  modifications  of  slavery. 
The  abolition  of  proprietary  rights  in  man  is  the  most 
important  strand  in  economic  history.  The  owners  of 
land  and  capital  have,  no  doubt,  still  in  many  cases  great 
powers  over  labour,  analogous  in  some  respects  to  the 
former  powers  of  the  owners  of  slaves  and  serfs,  but  they 
are  better  considered  under  the  quantitative  distribution 
of  incomes  (especially  real  wages,  and  on  analogy,  real 
rents). 

3.  The  Quantitative  Distribution  of  Incomes.  —  The  great 
flow  or  stream  of  wealth,  or  produce  (Sidgwick),  or  eco- 
nomic utilities  (as  here  defined)  finds  its  way  ultimately 
through  minute  capillaries  to  the  millions  of  individual 
consumers.  But,  to  begin  with,  we  may  say  that  it  is 
distributed  in  three  main  channels.  Or,  without  further 
metaphor,  there  are  three  great  species  of  income  that 
correspond  to  the  three  great  agents  of  production.  The 
owners  of  land,  capital,  and  labour  obtain  rents,  profits, 
and  wages  respectively.  Taking  a  broad  view,  and  with 
simple  or  hypothetical  illustrations,  these  incomes  seem 
quite  distinct.  But  economic  analysis  soon  reveals  that 
in  reality  they  overlap  or  are  blended  in  varying  propor- 
tions. Economic  rent,  the  share  of  the  natural  qualities 
of   the   land,   is,   in   practice,   inextricably   blended   with 


140  ELEMENTS  OF  POLITICAL  ECONOMY 

profit  rent,  the  share  of  the  acquired  qualities  of  the 
land ;  the  largest  part  of  gross  profits  is  a  form  of  wages. 
Even  ill  the  eighteenth  century  Adam  Smith  reduced  a 
part  of  wages  to  profits  of  capital  sunk  in  the  production 
of  the  finished  labourer ;  while  at  the  end  of  the  nine- 
teenth Professor  Marshall  has  reduced  a  part  of  the  earn- 
ings of  labour  and  capital  to  quasi-rents.  It  follows  that 
all  these  kinds  of  income  will  require  careful  analysis  to 
discover  their  real  meaning  and  the  real  nature  of  their 
claims  to  rank  as  distinct  species.  The  quantitative  dis- 
tribution of  these  incomes,  or  the  discovery  of  the  laws 
(economic)  that  govern  the  amounts  of  rents,  profits,  and 
wages,  is  a  matter  of  still  greater  difficulty.  It  is  to  this 
group  of  problems  that  the  attention  of  economists  has 
recently  been  most  directed. 

It  will  be  found  that  in  each  case  law  and  custom  still 
exercise  considerable  influence,  but  in  the  course  of 
progress  their  influence  has  been  more  and  more  sub- 
ordinated to  that  of  contract.  For  a  long  period  in 
England  rents  were  paid  in  labour  and  produce,  and  real 
wages  were  paid  in  rights  of  occupancy  of  land,  while  the 
relations  of  the  lord  of  the  manor  to  his  serfs  were  deter- 
mined by  custom  with  the  power  of  law.  And  during 
this  period  most  of  the  labour  of  the  country  was  more 
or  less  bound  to  the  soil.  Even  in  trades,  until  the  repeal 
of  the  Statute  of  Apprenticeship  (finally  in  1814),  the 
justices  of  the  peace  were  supposed  to  fix  the  rates  of 
wages,  though  the  law  had  long  before  fallen  into  disuse. 
At  present,  it  is  true,  in  many  industries  the  distribution 
of  earnings  between  wages  and  profits  is  determined  by 
what  is  called  collective  bargaining,  and  though  the  direct 


QUANTITATIVE  DISTRIBUTION  141 

influence  of  law  is  small,  that  of  custom  is  large.  The 
direct  effect  of  law  is  best  seen  in  real  wages,  in  which  we 
take  account  of  the  conditions  of  work,  etc. 

The  influence  of  custom  is  also  still  greatly  felt  in  the 
department  of  consumption.  It  is  astounding  how  little 
regard  is  paid  to  real  utility,  and  how  ill  the  means  are 
adapted  to  the  attainment  of  what  is  supposed  to  be  the 
end  of  all  consumption.  But  it  is  consumption  that 
governs  demand,  and  demand  guides  production,  and  pro- 
duction is  intertwined  with  exchange  and  distribution. 

To  resume,  a  full  inquiry  into  the  quantitative  distri- 
bution of  incomes  ought  to  explain  :  — 

(1)  How  the  three  great  species  of  incomes  arise,  and 
what  are  the  causes  that  determine  the  relative  amounts 
of  each.  Take,  for  example,  the  national  income  of  the 
United  Kingdom  as  measured  in  terms  of  money.  Given 
the  necessary  statistics,  it  could  be  divided  into  three  parts 
that  are  assigned  respectively  to  the  owners  of  land,  capital, 
and  labour.  It  is  found  also  that  the  proportions  as- 
signed vary.  What,  then,  are  the  causes  and  conditions 
that  determine  the  relative  amounts  of  these  three  great 
incomes  at  any  time,  and  the  changes  from  time  to  time  ? 
We  are  here  concerned  with  general  wages,  general 
profits,  and  (by  analogy)  general  rents. . 

(2)  It  should  explain  also  the  reasons  of  the  differ- 
ences in  the  subspecies  of  these  great  incomes,  the 
causes  of  variations  in  the  return  to  different  kinds  of 
labour,  capital,  and  land.  Here  we  are  still  dealing  with 
comparatively  large  classes  and  aggregates.  Taking 
labour  in  the  extended  economic  sense,  we  pass  by  insen- 
sible steps  from  the  simplest  form  of  spade  work  to  the 


142  ELEMENTS  OF  POLITICAL  ECONOMY 

most  complex  form  of  brain  work ;  the  continuity  is 
illustrated  by  the  fact  that  the  efficiency  of  the  navvy 
varies  with  his  skill,  and  the  greatest  engineer  must  learn 
with  his  hands  (Nasmyth). 

Similarly,  profits  may  vary  from  the  no-profit  margin 
(Walker)  up  to  the  enormous  profits  of  successful  trusts. 

In  rents,  the  continuity  in  the  gradations  and  the  dif- 
ferences in  the  extremes  are  still  more  striking.  Land 
(also  taken  in  the  extended  economic  sense)  is  used  for 
very  different  purposes,  and  the  aggregate  rental  of  land 
will  be  distributed  in  different  ways  under  different 
conditions.  Even  when  we  take  economic  rent  in  the 
strict  sense  as  arising  solely  from  natural  qualities, 
there  are  different  kinds  with  different  origins. 

(3)  To  some  extent  an  explanation  must  be  given 
why  incomes  vary  from  individual  to  individual  in  the 
same  class.  In  all  the  highest  forms  of  labour,  e.g.  in 
the  professions,  there  are  great  differences  between  indi- 
viduals, and  it  is  most  important  to  distinguish  between 
the  aggregate  remuneration  of  the  class  and  individual 
gains  and  losses  (taking  account  of  the  expense  of  train- 
ing, etc.).  Similarly,  there  are  immense  differences  in  the 
profits  of  individuals,  and  the  reasons  of  these  divergences 
from  the  average  must  be  examined. 

4.  Money  Incomes  and  Real  Incomes.  — The  real  income 
of  a  nation  consists  of  economic  utilities,  including  con- 
sumable commodities  and  services  that  perish  in  the  act. 
The  largest  class  of  labour  is  that  of  domestic  servants 
of  all  kinds,  and  their  services  ought  to  be  reckoned  as 
equal  in  value  to  the  amount  of  their  wages,  including 
the  value  of  their  food,  lodging,  etc.     By  analogy,  also, 


QUANTITATIVE   DISTRIBUTION  143 

we  ought  to  include  in  the  real  national  income  similar 
services  for  which  no  money  is  paid,  and  which  are  not 
estimated  in  terms  of  money;  such  are  the  services  per- 
formed by  the  members  of  a  family  for  one  another. 

In  considering  the  share  in  the  real  national  income  that 
is  consumed  by  any  class  or  individual,  this  is  often  far  less 
than  is  indicated  by  the  money  income.  Any  one  who 
invests  part  of  his  income  in  any  form  in  reality  transfers 
to  that  extent  his  consuming  power  to  other  people.  The 
millionaire  himself  may  not  consume  for  his  own  personal 
wants  a  hundredth  jDart  of  his  income ;  in  his  case  a  large 
part  of  his  real  income  must  be  considered  to  be  in  the 
form  of  accumulated  rights  of  property.  And  in  estimat- 
ing the  value  of  this  property  the  same  things  must  not  be 
reckoned  twice  over.  Thus  we  ought  not  to  include  both 
the  income  of  the  railways  and  also  the  aggregate  of  the 
incomes  of  the  shareholders.  In  dealing  with  wages  in 
the  narrow  sense  of  the  term  it  is  usual  to  assume,  in  dis- 
tinguishing between  real  and  money  wages,  that  all  the 
money  is  spent  for  direct  consumption.  It  is  often  con- 
venient to  distinguish  between  money  rents  and  produce 
rents.  In  this  case  also  it  is  usually  assumed  that  the 
actual  produce  rent  is  all  turned  into  money.  But  in  the 
one  case  money  wages  may  be  saved  and  in  the  other  prod- 
uce may  be  directly  consumed. 

In  conclusion,  it  may  be  observed  that  the  distinction 
between  nominal  and  real  incomes,  whether  national  or 
particular,  is  always  of  importance,  and  a  transition  must 
never  be  made  from  one  meaning  to  the  other  without 
considering  the  essential  differences. 

It  seems  hardly  necessary  to  point  out  that  the  distinc- 


144  ELEMENTS  OF  POLITICAL  ECONOMY 

tion  between  the  classes  of  income  is  only  logical.  The 
same  person  may  have  an  income  composed  of  every  species 
of  revenue  to  which  economists  have  given  names. ^ 

1  It  has  been  found  necessary  to  omit  the  subject-matter  of  Principles, 
Book  II,  Chaps.  VI-IX  on  "Village Communities,"  "Feudalism,"  "Con- 
tracts for  the  Hire  of  Land,"  and  "Modern  Ownership  of  Land."  On 
the  influence  of  competition  and  custom  in  the  distribution  of  land  :  See- 
bohm,  English  Village  Community ;  Systems  of  Land  Tenure  (Cobden 
Club)  ;  Field,  Systems  of  Landholding ;  and  on  the  general  question: 
Mill,  Principles,  Book  II,  Chaps.  Ill  and  IV  and  Book  IV,  Chaps.  Ill 
and  VII,  sec.  7  ;  Sidgwick,  Principles,  Book  II,  Chaps.  I  and  XII ; 
Marshall,  Principles,  Book  II,  Chap.  IV,  and  Book  VI,  Chaps.  I  and  II ; 
Cannan,  Production  and  Distribution,  Chaps.  VI- VIII ;  Smart,  Distribu- 
tion of  Income. 


CHAPTER   VI 

WAGES  AND   THE  GENERAL   KATE   OF   WAGES 

1.   Wages  as  the  Real  Reward  of  a  Quantity  of  Labour.  — 

Wages,  like  labour,  may  be  regarded  from  two  points  of 
view,  subjective  and  objective.  By  wages  from  the  sub- 
jective point  of  view  we  mean,  in  the  more  familiar  language 
of  Adam  Smith,  the  reward  for  laying  down  so  much  ease 
and  happiness ;  or,  in  the  more  precise  language  of  to-day, 
the  utility  that  accrues  to  the  labourer  in  return  for  the 
disutility  of  his  toil. 

If  we  reckon  the  reward  simply  in  terms  of  money,  the 
wages  are  called  nominal ;  if  we  go  behind  the  money  and 
consider  what  it  will  purchase,  and  if  we  also  take  into 
account  all  the  other  desirable  things  the  worker  obtains 
in  return  for  his  toil,  we  arrive  at  the  conception  of  real 
wages. 

In  either  sense  —  whether  we  take  nominal  or  real 
wages  —  the  correlative  term  is  a  quantity  of  labour.  In . 
nominal  wages,  as  a  rule,  the  only  element  considered  in 
the  quantity  of  labour  is  the  time ;  the  money  wages  are 
calculated  by  the  hour,  day,  week,  or  year,  as  the  case  may 
be.  From  the  point  of  view  of  labour  with  which  alone 
we  are  at  present  concerned,  the  j^ear  is  the  best  unit  of 
time  to  take  in  estimating  the  money  or  nominal  earnings, 
though  the  bargain  may  be  struck  by  the  hour  or  the  day. 
L  145 


146  ELEMENTS  OF  POLITICAL  ECONOMY 

In  estimating  the  real  wages  that  correspond  to  a  certain 
amount  of  money  wages,  and  taking  as  the  unit  of  time  the 
year,  we  have  to  consider  a  number  of  variable  elements. 

2.  Real  as  compared  with  Nominal  Wages.  —  First,  as 
regards  the  quantity  of  labour  involved  in  the  course  of  the 
year,  we  must  consider  how  the  time  is  distributed.  The 
work  may  be  uncertain  and  irregular  ;  it  may  vary  between 
periods  of  great  intensity  and  periods  of  enforced  idleness. 
Other  things  being  the  same,  the  same  money  wages  per 
annum  will  mean  greater  or  less  real  wages,  according  to 
the  quantity  of  labour  involved ;  at  one  extreme  a  person 
might  pay  so  much  for  permission  to  perform  labour  which 
in  itself  gives  positive  utility  (or  the  nominal  wages  are 
negative)  ;  at  the  other  extreme  the  nominal  wages  would 
not  balance  the  disutility  involved  in  the  labour,  and  enough 
will  not  be  obtainable  without  compulsion.  An  author 
who  publishes  a  book  at  his  own  expense  generally  gets 
negative  wages  for  his  labour,  whilst  an  adequate  supply 
of  soldiers  may  need  conscription. 

Secondly,  as  regards  the  reward  obtained,  we  have  to 
consider  variations  in  the  purchasing  power  of  the  money. 
A  certain  amount  of  annual  money  earnings  varies  from 
time  to  time  and  from  place  to  place  in  its  purchasing 
power.  These  variations  may  be  due  to  general  causes 
(examined  later  in  the  theory  of  money  and  prices),  or  to 
special  causes  of  a  local  or  temporary  character.  In  the 
course  of  economic  progress  the  prices  of  commodities  that 
are  easily  transported  tend  to  become  uniform  throughout 
a  country  ;  but  there  are  always  variations  in  some  things, 
e.g.  house  rents.  Movements  of  prices  from  year  to  year 
are  also  less  violent  than  formerly,  but  we  can  still  distin- 


WAGES  AND  THE  GENERAL  RATE  OF  WAGES     147 

guish  between  dear  and  cheap  years  as  regards  important 
articles  of  consumption.  This  suggests  another  point.  It 
is  maintained  that  the  material  prosperity  of  the  working 
classes  can  be  measured  by  the  proportion  of  their  income 
spent  on  food,  that  is  to  say,  the  smaller  the  proportion  the 
greater  the  prosperity  (sometimes  called  Engel's  law, 
though  this  is  generally  taken  in  the  converse :  the  poorer 
the  family  the  more  spent  on  food).  It  follows  that,  other 
things  being  the  same,  a  fall  in  the  price  of  food,  or  more 
generally  of  necessaries,  has  more  effect  on  real  wages 
than  a  fall  in  non-necessaries.  In  estimating  real  wages 
we  must  then  always  consider  the  distribution  of  the 
money  earnings  in  the  nature  of  the  family  budgets  of 
the  working  classes. 

Besides  the  annual  money  earnings  of  the  head  of  the 
family  by  his  ordinary  employment,  we  must  take  account 
of  the  oj^portunities  afforded  for  extra  earnings  by  him- 
self or  the  members  of  his  family.  It  may  be  noted  that 
for  many  purposes  in  estimating  real  wages  it  is  best  to 
take  the  family  as  the  wage-earning  unit. 

Besides  the  money,  we  must  also  make  allowance  for 
any  additional  payments  in  kind  or  services.  This  factor 
is  often  of  great  importance  in  estimating  the  real  wages 
of  agricultural  labour,  especially  at  distant  periods :  thus 
there  may  be  allowances  of  food,  lodging,  fuel,  and  cloth- 
ing ;  there  may  be  some  share  in  the  stock  or  produce,  or 
the  right  to  the  use  of  land  or  common,  etc. 

Finally,  for  some  purposes,  it  may  be  best  to  take  as  the 
unit  of  time  not  the  year,  but  the  average  lifetime  in  the 
employment  considered. 

3.    Wages  as  Payment  for  Work  Done.  —  From  the  objec- 


148  ELEMENTS  OF  POLITICAL  ECONOMY 

tive  standpoint  we  have  to  consider  wages  as  payment 
made  for  so  much  work  done,  e.g.  raising  so  many  foot 
pounds  or  rendering  so  much  service.  The  quantity  of 
labour  (subjective)  is  now  only  of  importance  indirectly  as 
affecting  the  efficiency  of  labour.  To  the  employer,  the 
first  consideration  is  not  what  the  labourer  feels,  but  what 
he  does :  the  cost  of  labour  to  the  capitalist  now  takes  the 
place  in  the  wages  question  of  real  wages  to  the  labourer. 
By  analogy,  we  must  now  take  account  not  only 
of  the  money  paid,  but  of  everything  the  employer  must 
provide  in  addition.  The  amount  of  work  done,  may 
be  measured  in  different  ways,  of  which  a  very  com- 
plete account  is  given  in  the  Methods  of  Industrial  Re- 
muneration., by  D.  F.  Schloss.  There  are  two  principal 
methods  of  measuring  the  work  done,  and  the  corre- 
sponding wages  are  called  time-v^SigQs  and  jDiecg-wages. 
Even  these  two  methods  are  not  so  distinct  as  at  first 
sight  may  appear.  In  time-wages  there  is  always  a  tacit 
or  expressed  condition  that  so  much  work  measured  by 
some  other  standard  is  to  be  done  in  the  time ;  and  con- 
versely in  piece-work  limits  of  time  are  always  imposed 
within  which  the  work  must  be  done.  When  the  time 
in  which  the  task  or  a  definite  minimum  must  be  per- 
formed is  fixed,  the  wages  are  called  tos^-wages.  The 
difference,  between  these  species  depends  on  the  adjust- 
ment of  the  emphasis  as  is  usually  the  case  with  economic 
conceptions  and  classes.  Thus  even  in  domestic  service, 
where  there  is  no  vendible  product,  there  are  implied 
conditions  as  to  the  amount  and  kind  of  service  to  be 
rendered  in  a  certain  time.  Although  the  illustrations 
following  the  usual  practice  have  been  taken  from  com- 


WAGES  AND  THE  GENERAL  RATE  OF  WAGES     149 

mon  or  manual  labour,  the  same  ideas  may  be  applied 
to  the  highest  forms  of  labour  in  the  economic  sense. 
Thus  the  professional  man  must  also  consider  the  cost  of 
living  as  well  as  the  amount  of  the  fees  or  salary  obtained 
in  a  year,  and  mutatis  mutandis  he  must  allow  for  all  sorts 
of  disutilities  and  utilities. 

There  are  the  same  distinctions  also  from  the  objective 
standpoint.  Payment  may  be  made  to  the  professional 
man  by  the  employer  by  time  or  piece  or  task. 

Perhaps  the  most  striking  point  of  contrast  between 
manual  and  professional  labour  is  that  in  the  former  case 
one  employer  has  many  workers,  in  the  latter  one  worker 
has  several  employers. 

The  wide  extension  of  the  terms  labour  and  wages  in 
economics  is  one  of  the  difficulties  in  attaching  an  accu- 
rate meaning  to  the  expression,  a  general  rate  of  ivages. 

4.  The  General  Rate  of  Wages.  —  It  is  stated  by  Pro- 
fessor Marshall :  "  Such  phrases  as  the  general  rate  of 
wages  or  the  wages  of  labour  in  general  are  convenient 
in  a  broad  view  of  distribution,  and  especially  when  we 
are  considering  the  general  relations  of  labour  and  capital. 
But,  in  fact,  there  is  no  such  thing  in  modern  civilisation 
as  a  general  rate  of  wages.  Each  of  a  hundred  or  more 
groups  of  workers  has  its  own  wage  problem,  its  own 
special  causes,  natural  and  artificial,  controlling  the  supply 
price,  and  limiting  the  number  of  its  members;  each  has 
its  own  demand  price  governed  by  the  use  that  other 
agents  of  production  have  of  its  services."  It  is  of 
course  true  that  there  is  no  such  thing  as  a  uniform  rate 
of  wages  at  any  time.  In  a  great  industrial  country 
there  are  thousands   of   occupations   in  which    there   are 


150  ELEMENTS  OF   POLITICAL  ECONOMY 

different  rates  of  wages;  and  even  in  the  same  industry 
and  the  same  department  of  it  there  are  often  differences, 
e.g.  in  agricultural  wages  in  different  counties  in  England. 
All  economists,  however,  have  admitted  that  there  are 
such  differences,  and  have  tried  to  explain  them;  but 
most  of  them  have  also  used  this  conception  of  a  general 
rate,  and  have  sought  to  explain  movements  in  the  gen- 
eral rate  as  distinct  from  these  movements  in  particular 
occupations  that  are  due  to  changes  in  the  particular 
demand  and  supply  or  to  changes  in  the  quasi-permanent 
causes  of  difference. 

In  truth,  precisely  the  same  ideas  and  the  same  difficul- 
ties appear  in  dealing  with  the  general  rate  of  wages  as  in 
dealing  with  the  wider  conception  of  the  general  level  of 
prices.  As  will  be  shown  in  detail  in  the  theory  of 
money  and  prices,  we  distinguish  between  general  and 
relative  prices  ;  there  may  be  great  changes  in  the  general 
level  of  prices,  whilst  the  relative  values  of  commodities 
inter  se  remain  undisturbed. 

Similarly,  it  is  maintained  that  there  may  be  changes 
in  the  general  rate  of  wages  without  any  corresponding 
disturbance  of  relative  wages. 

But  changes  in  the  general  rate  of  wages  do  not  refer 
to  any  change  in  the  value  of  money ;  the  changes  referred 
to  are  real  changes.  Broadly  speaking,  a  rise  in  the  gen- 
eral rate  of  wages  means  that  throughout  the  whole  range 
of  labour  the  real  reward  rises.  If,  for  example,  the  prices 
of  commodities,  wliich  are  of  importance  in  workmen's 
budgets,  remain  the  same,  but  on  the  whole  money  wages 
rise  (measured  in  the  same  way  at  the  two  dates),  there  is 
said  to  be  a  rise  in  the  cfeneral  rate. 


WAGES  AND   THE   GENERAL  RATE  OF  WAGES    151 

As  a  rule,  in  any  great  industrial  country,  changes  are 
constantly  taking  place  in  the  actual  rates  of  wages  paid 
in  the  particular  occupations.  Accordingly,  the  move- 
ments in  the  general  rate  can  only  be  discovered  by 
taking  averages  of  fairly  representative  types. 

In  either  case  it  is  assumed  that  there  are  certain  causes 
at  work  of  a  general  character  that  operate  through  the 
whole  range  of  industry.  In  any  particular  case  the  effect 
of  these  general  causes  may  be  hidden  by  some  particular 
change  in  the  conditions  affecting  the  kind  of  labour  con- 
cerned. But  it  is  assumed  that  these  particular  changes 
will  be  small  compared  to  the  great  mass,  that  the  changes 
will  to  some  extent  also  counteract  one  another,  and  that 
beneath  the  particular  changes  the  influence  of  the  general 
causes  can  be  discovered. 

To  begin  with,  indeed,  we  are  concerned  simply  with  a 
question  of  measurement.  If  it  is  found  that  whilst  on 
the  whole  the  ratios  of  relative  wages  are  much  the  same, 
but  that  on  the  average  ever}'  kind  of  labour  obtains  more 
money,  and  that  there  has  been  no  corresponding  rise 
in  prices  (possibly,  indeed,  prices  may  have  moved  in  the 
opposite  way),  then  the  fact  of  the  general  rise  is  estab- 
lished, although  opinions  may  differ  as  to  the  causes  of  the 
rise.  We  have  records  of  wages  both  for  England  and 
France  extending  over  several  centuries  (Rogers  and 
Vicomte  d'Avenal)  ;  and  although  the  records  are  imper- 
fect, and  there  have  been  errors  in  calculating  the  averages, 
there  can  be  no  question  that  there  are  discoverable 
changes  in  the  general  rate.  And  during  the  last  fifty 
years  there  have  also  been  remarkable  changes  in  the 
general  rates  of  wages  in  the  great  industrial  countries. 


152  ELEMENTS   OF   POLITICAL  ECONOMY 

Thus  in  a  paper  by  Mr.  A.  L.  Bowley,  on  wages  in  the 
United  Kingdom  in  the  nineteenth  century,  it  is  said,  "  In 
1891  a  million  men,  women,  and  children  earned  per  head 
40  per  cent  more  in  actual  coin  and  92  per  cent  more  real 
wages,  if  the  increased  purchasing  power  of  money  is 
allowed  for,  than  their  million  predecessors  in  the  same 
trades  in  1860."  If  it  is  assumed  that  this  million  of 
workers  is  fairly  representative,  the  fact  of  a  great  rise  in 
the  general  rate  is  established  to  whatever  cause  or  causes 
it  may  be  assigned.  There  are  no  doubt  many  practical 
difficulties  in  comparing  different  times :  the  conditions  of 
work  change,  skilled  labour  may  give  place  to  machinery, 
new  processes  may  be  created,  etc.,  so  that  though  we 
compare  the  same  names,  we  do  not  perhaps  compare 
exactly  the  same  things.  New  industries  also  arise  and 
old  industries  disappear,  and  thus  the  trades  chosen  may 
not  be  fairly  representative.  There  are  also  difficulties  as 
regards  the  quotations  and  their  interpretation. 

Precisely  similar  difficulties,  however,  appear  in  all 
general  estimates  or  averages  in  progressive  societies,  e.g. 
the  growth  of  foreign  trade. 

The  conception  of  a  general  rate  may  also  be  of  use  in 
comparing  different  countries  at  the  same  time  instead  of 
the  same  country  at  different  times.  If  when  we  take 
representative  industries  of  a  similar  character  we  find 
that  in  one  country  the  average  is  higher  or  lower,  we 
argue  from  the  samples  to  the  whole,  and  the  validity 
of  the  conclusion  depends  on  the  assumption  that  there 
are  general  causes  at  work,  and  that  the  samples  are  fairly 
representative.  A  general  rise  in  the  rate  of  wages  has 
taken  place  in  the  United  Kingdom,  the  United  States,  and 


WAGES   AND   THE    GENERAL   RATE   OF    WAGES      153 

France  to  about  the  same  extent  in  each,  comparing  1844- 
1853  with  1891.  It  is  not  implied  that  the  general  rates  in 
the  respective  countries  are  the  same  at  either  period,  but 
only  that  the  rise  in  each  case  has  been  nearly  the  same. 

These  examples  are  of  course  only  illustrative,  but  at 
any  rate  they  raise  the  presumption  that  there  are  certain 
very  general  causes  that  affect  all  kinds  of  wages. 

One  more  difficulty,  however,  may  be  noticed.  In  the 
examples  taken  for  illustration  the  references  are  to  wages 
of  labour  in  the  common  and  narrow  sense  of  the  term. 
Are  we  to  assume  that  they  are  causes  of  such  a  general 
character  that  they  will  affect  wages  in  the  professions 
and  also  the  wages  of  superintendence  or  management 
that  form  so  large  a  part  of  gross  profits  ?  An  affirmative 
answer  is  suggested  by  two  considerations :  firsts  there 
seem  to  be  comparatively  stable  ratios  between  the  wages 
of  different  kinds  of  labour  from  the  highest  to  the  lowest, 
and  these  differences  depend  on  comparatively  general 
causes  ;  and,  secondly,  if  these  ratios  are  to  be  preserved, 
any  movement  that  affects  the  mass  of  the  lower  grades 
may  be  expected,  by  what  is  conveniently  called  sympathy, 
to  affect  also  the  higher  grades.  There  are  no  doubt 
great  difficulties  in  passing  directly  from  one  group  to 
another,  even  in  the  same  grade,  and  still  greater  when 
different  kinds  of  employment  are  compared,  and  this 
sympathetic  action  must  not  be  exaggerated. 

The  question  cannot,  however,  be  adequately  answered 
until  the  theories  have  been  examined  which  profess  to 
give  the  causes  of  movements  in  the  general  rates.  It 
may  appear  that  some  of  these  causes  are  such  as  to 
operate  throughout  the  whole  range  of  industry,  whilst 


154  ELEMENTS  OF  POLITICAL  ECONOMY 

others  may  be  such  as  to  act  differently  in  the  higher  and 
the  lower  grades  of  labour. ^ 

And  even  as  regard  the  lower  grades  of  labour  there  are, 
it  will  be  found,  differences  of  a  vital  character  so  far  as 
some  of  the  general  causes  are  concerned,  e.g.  the  largest 
class  of  all  (servants  of  all  kinds)  do  not  produce  vendible 
articles.  Thus  their  wages  are  not  directly  affected  by 
the  amount  produced  or  by  the  price  obtained  for  the 
product ;  both  of  these  factors,  however,  are  considered  of 
the  greatest  importance  in  industries  which  afford  material 
products  and  not  temporary  or  perishable  services. 

We  may  now  examine  the  theories  that  have  been  ad- 
vanced to  explain  the  causes  of  general  wages  and  of 
movements  in  general  wages.  The  first  is  the  celebrated 
Wages  Fund  theory. 

5.  The  Wages  Fund  Theory.  —  The  wages  fund  theory  is 
of  interest  to  the  student  in  three  ways :  for  its  place  in 
the  history  of  economic  thought;  from  its  influence  on 
popular  opinion  and  thus  indirectly  on  practical  labour 
questions,  and  because  properly  guarded  it  may  still  be 
considered  as  a  first  approximation  to  an  adequate  theory 
of  general  wages.  In  this  place  the  attention  must  be 
confined  to  the  third  of  these  topics. 

The  theory  is  correct  in  that  it  calls  attention  to  certain 
real  causes  affecting  wages  ;  but  it  is  partly  incorrect  and 

iThe  difference  between  the  higher  and  tlie  lower  grades  of  labour 
is  often  exaggerated  because  people  take  the  average  of  the  lower 
grades,  but  only  the  exceptions  (who  obtain  extraordinary  earnings)  in 
the  higher.  Thus  taldng  all  those  employed  in  law,  medicine,  education, 
business,  etc.,  tlie  average  earnings  may  not  be  much  above  artisans. 
The  same  increase  of  wealth  which  increases  the  demand  for  the  labour 
of  masons,  etc.,  increases  also  that  for  doctors,  lawyers,  etc. 


WAGES  AND   THE  GENERAL  RATE   OF  WAGES     155 

partly  incomplete  because  it  lays  too  much  stress  on  these 
causes  and  takes  no  notice  of  others  that  are  sometimes  of 
even  greater  importance. 

Stated  so  as  not  to  be  a  mere  truism  or  verbal  statement 
of  the  problem  to  be  solved,  the  theory  may  be  expanded 
into  three  propositions  :  — 

(1)  In  any  country  at  any  time  there  is  a  determinate 
amount  of  capital  to  be  devoted  unconditionally  to  the 
payment  of  labour.  This  is  the  wages  fund;  it  is  the 
effective  demaiid  for  labour. 

(2)  In  any  country  at  any  time  there  is  a  determinate 
number  of  labourers  who  must  work  independentlt/  of  the 
rate  of  wages.     This  is  the  supply  of  labour. 

(3)  The  fund  is  distributed  amongst  the  labourers 
under  the  influence  of  competition.  In  the  labour 
marhet  competition  is  the  ruling  force. 

The  theory  as  stated,  even  in  this  expanded  form,  is 
plainly  an  example  of  the  deductive  or  abstract  method. 
Accordingly  it  is  necessary  to  apply  the  test  of  verification. 

In  some  cases  it  seems  to  explain  the  facts  in  a  satisfac- 
tory way ;  in  others  it  fails  partially  or  completely. 

The  great  rise  in  wages  after  the  Black  Death  (which 
is  properly  described  by  Seebohm  as  the  watershed  of 
economic  history  in  the  mediaeval  period)  may  be  ac- 
counted for  in  terms  of  this  theory.  The  population  was 
halved;  the  demand  for  labour  to  till  the  ground,  etc., 
was  practically  unaffected,  and  competition  broke  through 
the  fetters  of  law  and  custom. 

Again  if  we  consider  the  general  wages  fund  to  be  made 
up  of  smaller  wages  funds  distributed  over  different  local- 
ities, it  seems  also  in  many  cases  correct.     If  any  part  of 


156  ELEMENTS  OF  POLITICAL  ECONOMY 

a  country  is  overpeopled  (congested)  relatively  to  the 
demand  for  labour  (or  the  fund  seeking  to  purchase 
labour),  the  rate  of  wages  is  low.  Similarly,  if  we  take 
particular  employments  in  place  of  localities  if  a  trade  is 
overstocked  with  people  and  understocked  with  capital, 
wages  are  low.  The  converse  is  also  true  of  places  and 
trades.  These  references  to  particular  wages  funds  may 
be  brought  under  the  general  theory  under  review  more 
formally  by  the  assumption  that  in  the  first  case  we  are 
dealing  with  a  small  country,  and  in  the  second  with  a 
country  in  which  there  is  only  one  main  employment  (as 
agriculture  in  the  mediseval  period). 

But  when  we  turn  to  other  facts,  the  theory  seems  to 
fail  or  at  best  only  to  explain  the  facts  by  being  twisted 
from  its  natural  interpretation.  Thus  a  population  may 
be  decreasing  rapidly  without  any  corresponding  effect  on 
wages;  in  Ireland  from  1848  to  1851  (when  a  million 
people  left  the  country),  in  spite  of  the  fall  in  the  supply 
of  labour  the  rate  of  wages  actually  fell.  Similarly,  there 
may  be  a  rapid  increase  in  capital  without  a  correspond- 
ing increase  in  population,  and  wages  may  not  rise  as 
was  constantly  illustrated  in  the  early  part  of  the  nine- 
teenth century.  One  of  the  most  striking  failures  of  the 
theory  (unless  unduly  strained)  is  in  the  high  wages  cur- 
rent in  new  countries  in  which,  as  a  rule,  there  is  a  rapidly 
increasing  population  and  a  marked  deficiency  of  capital. 
And  in  old  countries  we  often  find  that  there  is  what  is 
called  a  glut  of  capital  with  no  increase  of  population 
coincident  with  a  fall  in  wages,  as  in  a  depression  of  trade 
after  an  inflation  and  crisis. 

In  the  light  of  this  apparent  conflict  of  facts  it  is  neces- 


WAGES   AND  THE  GENERAL  RATE  OF  WAGES     157 

sary  to  examine  the  theory  again  to  discover  the  disturbing 
causes.  The  first  proposition,  that  there  is  an  amount  of 
capital  destined  to  be  given  unconditionaUi/  to  the  payment 
of  hibour,  is  clearly  overstated,  although  stress  must  be 
laid  on  this  term  if  we  are  to  avoid  the  barren  verbalism 
that  the  wages  fund  is  equal  to  the  sum  actually  paid  in 
wages.  If  we  consider  the  great  staple  industries  in  which 
the  capital  is  employed  in  the  production  of  material  com- 
modities for  sale,  it  is  plain  that  the  owners  or  employers 
of  the  capital  will  adjust  their  demand  for  labour  partly 
at  any  rate  by  the  actual  and  expected  profit,  which  again 
depends  proximately  on  the  course  of  prices.  This  close 
connection  of  wages  with  prices  is  so  well  recognised  that 
in  many  cases  the  principle  of  a  sliding  scale  has  been 
adopted,  the  wages  being  adjusted  to  movements  in  prices 
automatically  or  by  reference  to  authority  for  the  precise 
determination. 

Again,  if  we  consider  the  other  great  class  of  ordinary 
labour,  namely,  servants,  it  is  not  correct  to  say  that  the 
employers  set  aside  a  certain  portion  of  their  means  uncon- 
ditionally for  this  purpose ;  they  consider  what  they  can 
get,  and  what  they  can  do  without,  when  they  compare 
this  mode  with  other  modes  of  expenditure.  Similarly,  if 
we  take  the  demand  for  the  labour  of  the  professional 
classes,  —  doctors,  lawyers,  singers,  clergymen,  etc.,  —  there 
is  again  a  debatable  margin. 

But,  as  so  often  insisted  on  already,  although  in  all 
economic  conceptions  there  are  debatable  margins,  the  con- 
ceptions are  still  workable.  And  in  these  examples  we 
discover  that  there  is  an  element  of  truth  offered  by  the 
wages  fund  theory  by  way  of  explanation.     In  manufac- 


158  ELEMENTS  OF  POLITICAL  ECONOMY 

tures  and  the  like  the  existence  of  a  certain  amount  of 
fixed  and  specialised  capital  involves  the  continuous  appli- 
cation of  a  certain  amount  of  labour ;  works  may  even  be 
run  at  a  loss  for  a  time  in  order  not  to  disorganise  the 
business.  Again  there  is  a  quasi-necessary  demand  for 
services  of  all  kinds,  —  from  that  of  doctors  and  nurses, 
who  may  be  necessary  to  save  life,  to  that  of  domestics,  who 
are  thought  necessary  for  comfort  or  fashion. 

It  may  also  be  objected  to  the  capital  element  in  the 
wages  fund  theory  that  the  idea  of  a  fund  —  preaccumu- 
lated  and  predetermined  —  is  out  of  place.  The  harvest 
of  a  simple  state  of  society  does  not  fairly  represent  mod- 
ern industries.  We  have  a  continuous  stream  of  products. 
Part  of  this  stream  is  devoted  to  labour.  Still  even  here 
it  may  be  replied  that  a  large  part  of  this  stream  of  prod- 
ucts may  be  called  circulating  productive  capital,  and  con- 
sists of  things  adapted  and  only  adapted  for  the  consumption 
of  the  masses,  that  is  to  say,  of  the  labouring  classes  as  a 
whole.  And  in  truth  more  broadly  all  the  productive 
powers  of  the  country  at  any  time  are  devoted  to  provid- 
ing for  the  wants  of  the  nation  according  to  the  actual 
distribution  of  wealth.  It  would  obviously  be  impossible 
to  turn  the  capital  invested  in  the  production  of  things  on 
a  large  scale  for  thousands  and  millions  to  the  production 
of  luxuries  for  the  wealthy  owners  of  mines,  factories,  etc. 
In  a  broad  sense,  but  also  a  very  true  sense,  a  large  part 
of  the  productive  capital  of  a  country  is  devoted  to  the 
provision  of  things  of  use  only  to  labour,  and  these  real 
things  must  be  so  used  or  not  used  at  all.  The  latter  alter- 
native may  be  taken  under  certain  conditions  (Fourier),  and 
more  frequently  the  things  once  produced  may  no  longer 


WAGES  AND  THE  GENERAL  RATE  OF  WAGES     159 

be  produced,  but  then  in  either  case  the  wages  fund  may- 
be said  to  diminish. 

The  second  proposition  as  regards  the  number  of  labour- 
ers is  in  general  much  nearer  the  truth  and  the  whole  truth 
than  the  former.  Still  even  here,  as  is  shown  by  the  returns 
of  the  employment  of  labour,  by  the  fluctuations  in  pau- 
perism, by  strikes  to  prevent  a  fall  in  wages,  etc.,  there  is 
always  a  debatable  margin  ;  it  is  not  true  to  say  that  labour 
must  work  independently  of  the  rate. 

It  is  perhaps  to  the  tidrd  proposition  that  in  recent 
economic  books  most  exception  has  been  taken  ;  namely, 
the  proposition  which  declares  that  the  wages  fund  is  dis- 
tributed by  competition.  Competition  may  be  considered 
positively  and  negatively.  On  the  positive  side  competi- 
tion implies  that  every  person  tries  to  attain  his  own 
economic  interests  regardless  of  the  interests  of  others. 
Negatively  it  is  implied  that  the  self-interest  is  not  attained 
by  combination  or  by  law  or  by  custom.  Competition  also 
implies,  if  perfect,  that  each  person  knows  his  own  inter- 
ests and  that  there  is  perfect  mobility  of  labour.  If  this  is 
a  fair  account  of  what  is  to  be  understood  by  competition 
in  the  wages  fund  theory,  it  is  clear  that  in  practice  it  is 
liable  to  be  modified  by  disturbing  causes.  Thus  there 
is  at  present  the  influence  of  combinations  both  of  employ- 
ers and  employed,  and  especially  when  real  wages  are  taken 
there  is  still  considerable  influence  on  the  part  of  law. 
Custom  also  imposes  many  obstacles  to  the  passing  of 
labour  from  group  to  group,  and  in  some  cases  influences 
directly  the  rate  of  wages  (as  in  the  case  of  women).  At 
the  same  time,  however,  competition  is  sometimes  concealed, 
tliough  really  at  work.     Custom  is  often  a  form  of  slowly 


100  ELEMENTS   OF  POLITICAL   ECONOMY 

moving  competition  (Marshall),  and  within  the  combinations 
of  labour  and  capital  the  law  of  substitution  (Marshall)  is 
a  form  of  competition. 

6.  The  Produce  Theory  of  Wages.  —  In  trying  to  bring 
out  as  far  as  possible  the  elements  of  truth  contained  in 
the  wages  fund  theory,  to  some  extent  the  opposing  theory 
(the  produce  theory)  has  been  anticipated.  It  may  be  well 
then  to  state  definitely  first  of  all  the  points  in  which  the 
two  theories  are  most  opposed.  The  wages  fund  is  sup- 
posed to  be  preaccumulated,  and  predetermined  in  its 
amount  and  its  application.  (The  student  later  on  will 
see  that  in  the  quantity  theory  of  money  in  its  simplest 
form  the  amount  of  money  is  similarly  fixed  and  it  must 
all  be  circulated.)  In  the  produce  theory  stress  is  laid  on 
the  fact  that  wages  are  paid  out  of  a  continuous  stream,  and 
not  out  of  a  fund,  stored  up  it  may  be  a  long  time  before. 
In  this  later  theory  it  is  also  assumed  that  the  amount  of 
the  flow  of  wealth  devoted  to  labour  will  depend  partly  on 
forces  that  cannot  be  summed  up  under  competition. 

If  we  suppose  that  the  real  national  income  or  flow  of 
wealth  is  divided  into  rent,  wages,  and  profits,  it  is  clear 
that  the  amount  of  any  one  will  depend  first  on  the 
amount  of  the  total  stream,  and  next  on  what  is  taken 
by  the  other  two.  If  we  leave  for  future  consideration 
rent  which  is  of  the  nature  of  a  surplus,  and  the  revenues 
of  government  which  are  taken  by  compulsion,  we  have 
left  the  aggregate  earnings  to  be  divided  between  labour 
and  capital.  Here  we  are  again  met  by  the  difficulties 
of  definition  and  classification  which  have  so  often  been 
noticed  before. 

It  seems  best,  then,  in   the  first  place,  to  narrow  the 


WAGES  AND  THE   GENERAL  RATE  OF   WAGES     161 

teiMii  irnijes  to  the  earnings  of  labour  in  industries  which 
yiehl  vendible  products,  e.g.  manufactures.  The  so-called 
wages  of  management  are  placed  under  profits,  and  the 
profits  of  the  emj^loyers  are  opposed  on  this  view  to  the 
wages  of  their  employees. 

Speaking  broadly,  the  distribution  between  wages  and 
profits  (as  now  defined)  will  depend  on  the  relative 
strength  of  capital  and  labour.  This  relative  strength 
again  will  depend  on  various  elements.  The  first  may- 
be called  the  intensity  of  the  reciprocal  demand  of  labour 
and  capital  for  their  mutual  services.  This  brings  in 
under  another  aspect  the  competition  element  on  which 
the  older  theory  lays  so  much  stress.  If  capital  increases, 
labour,  being  the  same,  the  owners  of  capital  compete  for 
labour  to  a  greater  degree  and  so  far  wages  rise.  And 
more  generally,  in  response  to  changes  in  the  relative 
proportions  of  labour  and  capital,  wages  rise  or  fall  or 
remain  steady.  (All  these  cases  are  worked  out  in  detail  in 
Mill,  Book  IV,  Chap.  Ill  —  a  survey  which  Marshall  thinks 
is  the  necessary  complement  to  the  wages  fund,  and  not 
so  misleading.)  But  on  the  modern  view  this  recipro- 
cal demand  is  not  sufficient.  The  relative  strength  may 
be  affected  directly  by  the  influence  of  law  and  custom. 
In  former  times  these  influences  were  largely  on  the 
side  of  capital.  Thus  wages  were  lower  than  they  would 
have  been  if  perfect  competition  had  prevailed.  On 
the  side  of  capital  there  was  open  or  tacit  combination 
to  keep  down  wages,  with  no  corresponding  combination 
on  the  side  of  labour,  and  in  effect  capital  had  a  buyer's 
monopoly. 

At  present  the  influence  of  law  affects  wages  in  favour 


162  ELEMENTS   OF   POLITICAL   ECONOMY 

of  the  workers  indirectly,  and  is  best  considered  by  tak- 
ing the  elements  in  real  wages.  Thus,  legislation  may 
improve  the  conditions  of  work;  it  may  prevent  truck 
in  some  cases,  and  in  others  insist  on  a  certain  quantity 
of  food,  etc.,  being  provided  (sailors);  it  may  affect  the 
kind  of  house  accommodation,  sanitation,  education,  etc. 
Compulsory  compensation  may  be  awarded  in  case  of 
injury  received  in  the  employment,  and  the  hours  of 
labour  may  be  limited.  The  example  of  some  of  our 
colonies  shows  that  compulsory  arbitration  may  be 
adopted,  and  in  this  case  the  wages  are  supposed  to  move 
between  limits.  The  old  allowance  system  was  apparently 
intended  to  enforce  the  principle  of  a  legal  minimum 
or  "  living  wage,"  though  the  standard  was  on  a  compara- 
tively low  scale.  These  and  similar  objects,  when  not 
attained  by  law,  are  aimed  at  by  trade  unions,  which 
may  be  brought  logically  under  custom.  (See  below, 
Chap.  IX.) 

But  although  in  this  case  especially  the  wages  fund 
theory  must  be  modified  and  supplemented,  the  causes 
indicated  in  that  theory  are  always  real  and  always  of 
importance.  The  amount  of  capital  and  the  number  of 
labourers  are  always  of  primary  importance,  and  compe- 
tition is  more  often  overshadowed  than  displaced  by  the 
other  influences  noted. 

The  wages  fund  theory,  however,  naturally  suggests 
that  wages  cannot  be  directly  benefited  as  in  the  case 
of  improvements,  etc.,  except  first  of  all  more  capital  is 
saved.  The  produce  theory,  on  the  other  hand,  naturally 
suggests  that  the  state  of  trade,  the  efficiency  of  labour, 
and  all  the  factors  that  affect  the  real  national  income, 


WAGES  AND  THE   GENERAL  RATE  OF  WAGES     163 

may  benefit  labour  directly,  if  only  labour,  either  through 
law  or  combination,  can  exercise  its  full  strength  in  bar- 
gaining. 

When  the  view  of  wages  is  extended,  so  as  to  cover 
the  reward  or  the  share  in  the  real  national  income  of 
all  kinds  of  labour,  then  the  produce  theory  as  applied 
to  manufactures  appears  too  narrow.  As  regards  ser- 
vants and  the  professional  classes,  the  demand  for  their 
services  increases  with  the  flow  of  national  wealth,  which 
is  devoted  to  services  in  preference  to  consumable  com- 
modities or  forms  of  productive  capital.  The  supply  of 
labour  of  this  class  depends  partly  on  the  general  increase 
of  population,  and  partly  on  the  relative  attractiveness 
of  different  employments.  The  distribution  as  between 
the  great  classes  depends  partly  on  influences  that  may 
be  brought  under  competition,  and  partly  on  such  as 
are  logically  considered  under  law  and  custom.  [The 
causes  of  differences  of  wages  in  different  employments 
are  considered  in  the  next  chapter.]  It  is  clear  that 
these  causes  of  relative  differences  have  an  effect  on 
the  so-called  general  rate  if  that  term  is  narrowed  down, 
as  is  often  the  case  in  the  statement  of  the  produce 
theory  so  as  to  include  only  the  wages  of  those  employed 
in  material  production  for  the  profit  of  their  employers 
(Walker).  The  large  part  of  profits  that  is  called  wages 
of  management  is  closely  related  to  the  earnings  of  the 
professions,  and  the  wages  of  those  employed  in  factories 
is  related  to  the  wages  of  domestic  servants.  We  are 
not  entitled  to  say  more  than  that  there  is  a  mutual  in- 
teraction between  these  various  rates;  we  certainly  can- 
not say  that  the  rates  in  manufactures,  mining,  etc.,  are 


164  ELEMENTS  OF  POLITICAL  ECONOMY 

first  fixed,  and  then  the  other  rates  in  the  various  "ser- 
vices "  are  fixed  in  proportion  (Hadley). 

7.  General  Relations  of  Wages  to  Profits  and  Rents.  —  So 
far  we  have  considered  the  general  causes  affecting  wages 
without  introducing  the  other  great  species  of  incomes, 
profits  and  rents  except  indirectly.  The  changes  in  the 
relative  proportions  are  properly  considered  under  the 
effects  of  economic  progress  (see  Book  IV).  Of  course,  as 
already  observed,  so  long  as  the  national  income  remains 
the  same,  the  share  of  any  one  will  depend  on  the  pro- 
portionate shares  of  the  other  two.  But  the  point  of 
most  interest  and  difficulty  is  in  the  indirect  effect  of  a 
change  in  the  proportions  on  the  total  income.  Thus  if 
either  through  the  power  of  trade  unions  or  the  direct 
influence  of  socialistic  legislation  the  share  of  capital  were 
greatly  reduced,  the  immediate  effect  might  be  a  rise  in 
wages  (absolutely)  ;  but  if  the  productive  capital  were  to 
begin  to  dwindle  owing  to  this  fall  in  its  share,  the  effect 
on  the  aggregate  national  income  might  be  such  that  real 
wages  would  fall.  Thus  to  take  an  extreme  case  the 
proportionate  share  of  labour  might  continually  increase 
until  that  original  state  of  things  was  restored  in  which 
"the  whole  produce  of  labour  belongs  to  the  labourers." 
This  is  the  state  that,  according  to  Adam  Smith,  precedes 
the  appropriation  of  land  and  the  accumulation  of  stock. 
It  needs  no  showing,  however,  that  in  the  Saturnia  regna 
of  history  the  real  wages  of  labour  were  never  so  low,  or, 
what  is  practically  the  same  thing,  the  condition  of  the 
people  so  miserable. 

Just  as  in  foreign  trade  it  is  false  to  suppose  that  one 
nation  must  and  can  only  gain  if  another  loses,  so  also  in 


WAGES   AND   THE   GENERAL   RATE   OF   WAGES      165 

the  exchange  of  the  services  of  the  great  productive 
agents  and  of  the  various  industrial  groups  it  is  false 
to  suppose  that  mutual  injury  is  the  source  of  benefit. 
There  are  no  doubt  points  of  conflict  between  the 
interests  of  labour  and  capital,  and  what  one  loses  the 
other  will  gain ;  but  there  are  also  points  of  harmony. 
And  so  far  as  distribution  can  be  considered  as  based  on 
exchange,  the  leading  idea  must  be  one  of  mutual  benefit. 
These  points  will  call  for  further  attention  after  the 
examination  of  profits.     (See  below,  Chap.  IX.)^ 

1  All  the  text-books  treat  largely  of  general  wages.  The  treatment  in 
Adam  Smith  contains  in  germ  both  the  later  theories,  and  may  well  be 
taken  as  a  beginning.  Malthus,  Essay  on  Population,  Book  III,  Chap.  V, 
Book  IV,  Chap.  III.  Mill's  chapters  on  Pop^iJar  Remedies  for  Low  Wages 
and  his  own  remedies  show  the  real  meaning  of  the  wages  fund  theory 
and  that  as  stated  by  Mill  it  needed  modification.  Sidgwick's  chapter  on 
the  General  Bate  of  Wages  {Principles,  Book  II,  Chap.  VIII)  may  be 
taken  next,  and  then  Marshall's  chapters  on  the  relations  of  distribution 
and  exchange.  Principles,  Book  VI,  Chaps.  I  and  II.  Special  works  are  : 
Walker,  Wages  Question;  Taussig,  Wages  and  Capital;  Davidson,  The 
Bargain  Theory  of  Wages  ;  Nicholson,  Effects  of  Machinery  on  Wages  ; 
Smart,  Distribution  of  Income  ;  J.  B.  Clark,  Distribution  of  Wealth  ; 
Cannan,  Theories  of  Production  and  Distribtition  ;  Schloss,  Methods 
of  Industrial  Remuneration  ;  Webb,  Industrial  Democracy. 


CHAPTER  VII 

RELATIVE    WAGES 

1.  Diiferences  of  Wages.  —  Experience  shows  that  there 
are  at  any  time  differences  in  the  rates  of  wages  actually- 
paid  whatever  measure  is  adopted ;  and  a  number  of  par- 
ticular causes  of  difference  have  been  pointed  out  by  econo- 
mists, the  lines  of  treatment  of  Adam  Smith  in  a  famous 
chapter  being  generally  followed.  It  seems  best,  however, 
in  this  summary,  to  begin  with  the  most  general  causes 
and  conditions  by  which  these  particular  influences  may 
be  explained. 

Wages  as  already  shown  must  always  be  considered 
from  two  points  of  view.  On  the  subjective  side  the 
labourer  will  take  into  account  all  the  utilities  and  disu- 
tilities involved  in  the  work,  and  in  what  is  obtained 
from  expending  the  money  received,  and  any  extra  earn- 
ings. If  competition  were  perfect,  and  all  tlie  conditions 
requisite  to  mobility  of  labour  were  forthcoming,  the  net 
advantages  of  all  employments  would  tend  to  equality. 
Thus  extra  disutilities  of  any  kind  would  be  compensated 
by  extra  wages ;  and  conversely,  if  the  work  itself  had 
positive  utility,  it  would  command  so  far  less  wages.  In 
this  way  we  may  take  account  of  such  natural  causes  of 
differences  as  are  enumerated  by  Adam  Smith,  e.g.  the 
agreeableness  or  disagreeableness  of  the  employment ;  the 
easiness  or  the  reverse  in  learning  the  business  (the  greater 

166 


RELATIVE  WAGES  167 

the  trouble,  the  greater  the  disutility);  the  regularity 
of  the  employment,  and  the  chance  of  success  or  the 
reverse. 

This  tendency  to  equality,  however,  from  the  subjec- 
tive side,  is,  like  all  other  economic  tendencies,  liable  to 
be  counteracted.  The  causes  indicated  are  only  part  of 
those  that  affect  the  suppli/  of  labour  in  the  different 
employments ;  and  in  addition  there  are  all  the  causes 
affecting  the  demand  for  particular  kinds  of  labour. 

The  introduction  of  demand  involves  the  consideration 
of  labour  from  the  objective  point  of  view.  Here  we  have 
to  take  account  of  the  fact  that  different  degrees  of  abili- 
ties, natural  and  acquired,  are  demanded  in  different 
employments.  Thus,  a  long  training  not  only  involves 
more  disutility  (subjective),  but  also  greater  expense.  It 
is  only  those  who  have  the  means  who  can  train  them- 
selves or  their  children  for  these  more  exacting  employ- 
ments. Sometimes  exceptional  natural  qualities  are 
needed,  —  it  may  be  of  intellect,  or  keenness  of  sense, 
or  even  morality  (e.g.  the  greater  or  less  trust  pointed 
out  by  Adam  Smith). 

Again,  the  work  required  to  be  done  may  be  done 
in  different  ways  :  by  a  small  amount  of  highly  efficient 
labour  or  by  a  much  greater  amount  of  less  efficient 
labour.  From  the  point  of  view  of  demand,  it  is  in- 
different to  the  employer  what  method  is  adopted  so 
long  as  the  cost  is  the  same.  It  is  clear,  however,  that 
the  more  efficient  the  labour,  so  much  the  higher  may  be 
the  pay. 

Thus  on  the  objective  side  we  arrive  at  the  proposition 
that  equal  efficiency  tends  to  he  paid  for  at  equal  rates ; 


168  ELEMENTS  OF  POLITICAL  ECONOMY 

and  so  far  as  competition  is  effective,  equal  degrees'  of 
skill  should  command  the  same  price. 

It  is  evident  that  when  we  are  comparing  different 
employments  it  is  not  easy  to  estimate  the  amount  of 
skill  required;  it  is,  however,  certainly  taken  account 
of  whenever  any  substitution  is  possible. 

Besides  these  natural  causes  that  affect  the  demand 
for  and  the  supply  of  labour  under  the  assumption  of 
perfect  competition  and  mobility,  there  are  actually  all 
the  causes  which  render  these  conditions  imperfect. 

Here  the  general  principle  is  that  anything  that  modi- 
fies competition  or  mobility  so  far  modifies  wages.  Adam 
Smith  pointed  out  that  "the  policy  of  Europe"  in  some 
employments  had  unduly  restrained  competition,  e.g.  the 
regulations  of  gilds  and  corporations  by  restricting 
entrances  ;  in  some  occupations  the  competition  had  been 
unduly  increased,  e.g.  the  church,  education,  and  literature, 
through  charitable  endowments  ;  in  other  cases,  the  nat- 
ural passage  of  labour  from  place  to  place  and  from  trade 
to  trade  had  been  hindered,  e.g.  by  the  ill-contrived  law  of 
settlements ;  and  sometimes  the  law  had  directly  inter- 
vened to  fix  wages  in  certain  employments. 

The  general  result  of  all  these  influences,  both  natural 
and  artificial,  is  that  there  is  practically  a  special  wages 
problem  in  every  group  (Marshall) .  Whilst  this  is 
admitted,  at  the  same  time  it  appears  that  the  general 
causes  noticed  in  the  last  chapter  are  always  at  work ; 
and  thus  we  may  have  movements  in  the  general  level 
of  wages,  the  ratios  between  the  different  employments 
remaining  relatively  constant  or  only  changing  in  re- 
sponse to  particular  causes.     (For  examples,  see  below, 


RELATIVE  WAGES  169 

Book  IV.)  If  in  any  group  having  regard  both  to  disu- 
tility involved  and  efficiency  required  the  rate  of  wages 
is  above  or  below  this  general  rate,  it  will  be  unstable 
and  causes  will  come  into  play  that  will  tend  to  bring 
it  toward  its  natural  or  normal  rate.  The  influence 
of  the  natural  causes  may  of  course  be  counteracted  by 
the  artificial  effects  of  law  and  custom  in  various  forms. 

2.  Particular  Cases.  —  One  or  two  particular  cases  may 
be  noticed  which  illustrate  the  argument  of  the  last 
section.  It  is  often  found  that  the  most  disagreeable  em- 
ployments are  the  worst  paid  (the  evil  paradox  of  Profes- 
sor Marshall)  .  From  the  side  of  supply  this  is  explained 
by  the  fact  that  the  labourers  have  no  choice :  they  are 
the  dregs  of  the  people  ;  from  the  point  of  view  of  demand 
their  labour  is  extremely  inefficient,  but  it  may  be  so 
cheap  as  to  cost  even  less  than  more  efficient  but  higher 
priced  labour.  The  wages  in  agriculture  have  generally 
been  lower  than  would  be  indicated  by  an  estimate 
of  the  skill  required  and  the  hardships,  etc.,  endured. 
This  seems  accounted  for  by  the  fact  that  the  supply 
naturally  increases,  whilst  the  demand  either  remains 
steady  or  even  falls.  Thus  for  centuries  there  has  been 
a  movement  of  labour  from  the  country  without  the 
"natural"  proportion  being  attained. 

The  wages  of  women  are  in  most  cases  lower  than 
those  obtained  by  men  for  work  of  similar  difficulty  and 
disutility.  The  main  reason  is  that  the  employments 
open  to  women  are  restricted  by  custom. 

The  case  of  those  avIio  have  other  means  of  support 
is  of  interest,  e.g.  peasant  proprietors  and  other  small 
landholders.     A  peasant  who  is  already  sure  of  a  liveli- 


170  ELEMENTS  Of  POLITICAL  ECONOMY 

hood  can  refuse  to  work  for  wages  in  his  spare  time 
and  may  set  a  high  reserve  price  on  his  labour.  On  the 
other  hand,  he  may  set  a  low  value  on  his  spare  time 
and  on  leisure,  and  may  be  keen  to  earn  a  little  money 
for  luxuries.  Mill  accounted  for  the  high  wages  current 
on  the  continent  for  any  supplementary  work  by  the  first 
principle,  whilst  Adam  Smith  gives  examples  from  Scot- 
land of  extra  work  being  done  by  cottars  for  very  small 
remuneration.  In  modern  phraseology  the  marginal 
utility  of  money  was  higher  in  Scotland  than  in 
France. 

If  an  industry  is  declining,  the  rate  of  wages  falls 
below  the  average,  owing  to  the  want  of  mobility  of 
labour,  e.g.  the  hand-loom  weavers.  On  the  other  hand, 
a  new  industry  offers  more  wages  to  attract  labour,  and 
it  is  the  more  enterprising  and  efficient  labour  that  is 
attracted,  and  thus  the  rate  of  wages  may  be  for  some 
time  above  the  general  level  for  the  class  of  work. 

Again,  any  sudden  rise  in  the  demand  for  labour  in 
an  old  occupation  raises  the  rate  of  wages  until  the 
supply  can  be  adjusted.  In  such  cases  as  this  the  differ- 
ential wage  may  be  described  as  a  quasi-rent  (?ilarshall). 
The  rise  in  the  demand  for  labour  may  be  in  the  direct 
demand,  e.g.  for  servants ;  or  in  the  derived  demand 
(Marshall),  i.e.  derived  from  the  demand  for  the  com- 
modity to  which  the  labour  in  question  contributes. 

With  the  extension  of  the  principle  of  association  or 
combination,  both  the  sellers  and  the  buyers  of  labour 
try  to  substitute  monopoly  for  competition.  If  a  large 
trust  has  the  practical  command  of  a  group  of  industries, 
it  may  be  able  to  establish  a  buyer's  monopoly  and  even 


RELATIVE   WAGES  171 

refuse  to  deal  with  combinations  of  labour;  and,  con- 
versely, a  strong  trade  union  against  divided  or  keenly 
competing  masters  may  establish  a  seller's  monopoly. 
The  rate  of  wages  will  tend,  in  the  first  case,  to  be 
below,  and  in  the  second  above,  the  natural  rate.  The 
limits  of  the  rise  and  fall  can,  however,  only  be  explained 
after  the  theory  of  monopoly  value. 

3.  Wages  of  Individuals. — We  have  now  considered  the 
causes  that  affect  the  general  rate  of  wages  throughout 
an  industrial  country,  and  the  causes  that  give  rise  to 
differences  of  wages  in  different  employments.  In  both 
cases  we  have  been  concerned  with  averages,  and  for  fuller 
treatment  the  student  should  refer  to  works  on  statistics 
(^e.g.  A.  L.  Bowley).  The  general  result  is  that  differ- 
ences in  the  general  rate  and  differences  between  the  rates 
in  different  employments  are  under  the  influence  of 
economic  laws  or  tendencies  of  a  more  or  less  general 
character. 

When,  however,  we  turn  to  individuals,  we  notice  such 
differences  in  extreme  cases  that  they  seem  to  elude  any 
general  explanation,  e.g.  the  wages  of  the  most  successful 
lawyers  or  doctors  or  singers,  etc.  In  the  first  place  it 
must  be  observed  that  if  the  professions  in  question  em- 
ploy a  large  number  of  persons,  in  spite  of  the  high  wages 
obtained  in  some  cases,  the  average  may  be  low,  having 
regard  to  usual  causes  of  differences.  Thus  the  average 
earnings  of  actors  are  probably  below  those  of  carpenters, 
in  spite  of  the  large  sums  earned  in  special  cases.  In 
these  exceptional  individual  cases  the  high  pay  is  ex- 
plained on  the  principles  of  scarcity  value.  The  excep- 
tional demand  is  not  for  actors,  but  for  Duse  or  Bernhardt. 


172  ELEMENTS  OF  POLITICAL  ECONOMY 

The  scarcity  factor  explains  both  the  high  fees  of  the 
fashionable  doctor  (who  by  the  testimony  of  his  colleagues 
is  no  better  than  a  hundred  others),  and  also  the  high  fees 
paid  for  really  exceptional  skill. 

In  other  cases,  however,  the  differences  in  the  rates  of 
pay  are  accounted  for  on  the  principles  of  rent.  If  the 
marginal  labourer  earns  so  much,  the  more  efficient 
labourers  will  earn  so  mucli  more  in  proportion  to  their 
extra  efficiency. 

4.  The  Effects  of  Machinery  on  Wages. — As  illustrating 
the  principles  involved  in  the  wages  question,  some  of  the 
effects  of  machinery  on  wages  may  be  briefly  noticed. 

The  sudden  and  extensive  adoption  of  labour-saving 
machinery  so  far  tends  to  throw  labour  out  of  employ- 
ment. There  is  immediately  a  less  demand,  whilst  the 
supply  remains  for  the  time  the  same,  and  wages  fall. 
Such  sudden  and  extensive  substitution  are,  however, 
rare.  A  revolutionary  idea  takes  a  long  time  for  its  full 
development  in  practice,  and  thus  there  is  time  for  the 
gradual  withdrawal  of  labour.  If,  however,  the  labour 
concerned  by  habit  or  necessity  still  competes  witli  the 
machinery,  the  wages  must  fall,  and  until  this  is  effected 
the  machinery  earns  a  quasi-vent. 

On  the  other  hand,  as  the  use  of  the  machinery  is  ex- 
tended, the  price  of  the  article  falls,  and  it  is  possible  that 
the  consequent  extension  of  the  market  may  eventually 
lead  to  an  increase  of  employment  and  a  rise  of  wages 
in  the  industry  concerned  (Cotton).  The  proximate 
cause  of  the  adoption  of  machinery  is  the  hope  of 
extra  profit,  and  part  of  this  extra  profit  will  be  in- 
vested in   the    demand   for  more  labour   in   some   form. 


RELATIVE   WAGES  173 

Generally  the  use  of  machinery  means  increased  power 
over  nature  and  a  greater  return  to  the  productive  agents 
of  the  society.  The  rise  in  the  national  dividend  so  far 
tends  to  raise  the  general  rate  of  wages.  Since  also,  on 
the  whole,  a  much  greater  amount  of  skill  is  required  on 
the  part  of  labour  under  a  regime  of  machinery,  wages  so 
far  will  tend  to  rise.  (See  my  essay  on  the  Effects  of 
Machhiery  on  Wages.^ 

5.  Conclusion. — In  conclusion  it  may  be  observed  that  in 
treating  of  wages  it  has  been  necessary  to  anticipate  to 
some  extent  ideas  and  principles  that  are  more  fully  in- 
vestigated at  a  later  stage  (theory  of  rent,  value,  etc.). 
Anticipation  of  this  kind  is,  however,  necessary,  whatever 
the  order  of  exposition  chosen.  If  we  begin  with  value, 
we  must  anticipate  to  some  extent  wages  and  profits. 
The  statement,  "  that  the  value  of  labour  must  be  deter- 
mined by  the  value  of  the  produce,  not  the  value  of  the 
produce  by  that  of  the  labour,"  is  far  too  narrow  unless 
the  term  produce  is  extended  to  cover  services  of  all  kinds, 
and  the  sentence  is  interpreted  to  mean  that  the  value  of 
labour  depends  not  only  on  subjective  feelings,  but  on 
objective  results.^ 

1  Book  II,  Chap.  XII,  of  Principles  deals  with  the  effects  of  law  and 
custom  on  wages  from  the  historical  side.  See  Wealth  of  Nations,  Book  I, 
Chap.  X,  still  the  most  suggestive  treatment ;  Hadley,  Economics,  Chaps, 
"X  and  XI ;  Marshall,  Principles,  Book  VI,  Chaps.  III-VI ;  and  the  works 
cited  in  the  last  chapter  ;  Sidgwick,  Principles,  Book.  II,  Chap.  IX  ;  Pier- 
son,  Principles  of  Economics  (Eng.  trans.)  Part  I,  Chap.  VI,  §§  6,8; 
also  on  effects  of  machinery,  Hobson,  Evolution  of  Modern  Capitalism. 
In  Book  IV,  Chap.  VII,  of  my  Principles  (Vol.  Ill)  a  number  of  examples 
are  given  of  ratios  of  wages. 


CHAPTER  VIII 

PKOFITS 

1.  Analysis  of  Profits.  —  "The  profits  of  stock,  it  may 
perhaps  be  thought,  are  only  a  different  name  for  the  wages 
of  a  particular  sort  of  labour  —  the  labour  of  inspection  or 
direction.  They  are,  however,  altogether  different,  are 
regulated  by  quite  different  principles  and  bear  no  propor- 
tion to  the  quantity  hardship  or  the  ingenuity  of  this  sup- 
posed labour  of  inspection  and  direction"  (Adam  Smith). 
Most  economists,  however,  have  not  followed  Adam  Smith 
in  excluding  from  profits  this  form  of  wages.  Thus  Mar- 
shall, "  What  remains  of  his  profits  after  deducting  interest 
at  the  current  rate  (allowing,  where  necessary,  for  insur- 
ance), may  be  called  his  earnings  of  management." 

From  the  business  point  of  view  it  is  usually  said  that 
profit  is  the  excess  of  the  money  return  over  the  money 
cost.  But  this  statement  explains  nothing,  and  the  ques- 
tion still  remains :  Why  does  a  thing  obtain  more  than  its 
cost?  That  is  to  say,  when  all  the  parties  to  the  produc- 
tion and  acquisition  are  supposed  to  be  fully  alive  to  their 
own  interests,  and  competition  is  assumed  to  be  perfect. 

To  this  question  two  main  answers  have  been  given 
which  correspond  mutates  mutandes  to  the  twofold  treat- 
ment of  wages ;  namul}^  subjective  and  objective.  In  the 
first  answer  it  is  said  that,  on  the  whole,  the  owners  of 
capital  must  receive  a  sufficient  reward  for  abstinence,  an 

174 


PROFITS  175 

indemnity  for  risk,  and  wages  for  the  trouble  of  manage- 
ment ;  in  brief,  these  three  utilities  must  at  least  balance 
the  three  disutilities  involved  in  the  creation  and  employ- 
ment of  the  capital. 

The  objection  to  this  answer  is  that  it  only  lays  down 
the  necessary  conditions  for  the  continuous  supply  of  capi- 
tal. So  much,  at  least,  must  capital  receive ;  but  why 
not  more? 

The  second  answer  looks  to  the  utility,  efficiency,  or  pro- 
ductive power  of  the  capital.  It  assumes  that  capital  is 
one  of  the  agents  that  contribute  to  the  national  income, 
and  the  owners  exchange  its  services  against  the  services 
of  the  other  agents,  e.g.  labour  of  all  kinds.  From  this 
point  of  view  profits  depend  on  the  demand  for,  as  much  as 
on  the  supply  of,  capital.  The  demand  for  capital  may 
increase,  the  supply  remaining  the  same,  in  which  case  the 
profits  will  rise  independently  of  any  extra  exertion  on  the 
part  of  the  owners  of  capital. 

The  principal  use  of  the  first  analysis  is  not  to  give 
any  ethical  justification  of  profits,  but  to  show  that  the 
term  includes  different  elements  that  depend  on  different 
causes.     These  elements  will  be  examined  in  order. 

2.  Loan-interest  and  Profit-interest.  —  The  simplest  form 
of  profit  is  the  interest  derived  from  capital  lent  on  perfect 
security  and  without  any  trouble  on  the  part  of  the  lender, 
e.g.  when  an  old  lady  instructs  her  banker  to  put  her  divi- 
dends on  deposit  receipt,  or  her  broker  to  invest  in  more  con- 
sols. To  explain  this  form  of  interest  it  is  not  necessary 
to  carry  the  analysis  very  far.  The  old  lady  has  the  com- 
mand of  money,  and  other  people  wish  to  get  the  command 
of  money  immediately.     For  this  privilege  of  immediate 


176  ELEMENTS  OF  POLITICAL  ECONOMY 

use  they  are  willing  to  promise  more  money  in  the  future ; 
so  long  as  repayment  of  the  principal  is  deferred,  the  sum 
agreed  on  for  its  use  will  be  paid.  The  history  of  the 
development  of  this  simple  form  of  loan-interest  is  most 
instructive,  especially  in  connection  with  the  legal  and 
moral  aspects  of  usury  on  money.  From  the  earliest  times, 
however,  usury  (the  old  name  for  interest)  was  obtained 
on  all  sorts  of  things,  —  "  usury  of  victuals,  usury  of  any- 
thing that  is  lent  upon  usury."  And  in  modern  industrial 
societies  the  money  that  is  borrowed  at  interest  is  in  general 
only  the  means  for  the  acquisition  of  "  things."  (The  case 
in  which  the  money  is  required  as  such,  e.g.  to  meet  prior 
monetary  obligations,  is  treated  separately  at  a  later  stage.) 
Thus  a  man  may  borrow  money  to  buy  a  house  to  live  in, 
or  to  buy  machinery  to  work  his  land,  and  tlie  money  he 
obtains  from  the  bank  for  the  purpose  may  not  even  leave 
the  bank.  The  security  afforded  may  also  be,  for  all  prac- 
tical purposes,  perfect. 

Money  may  of  course  be  lent  without  interest  (as  by  the 
Jew  to  his  brother)  on  various  moral  grounds,  but  apart 
from  these  cases  it  is  important  to  notice  that  even  in  com- 
mercial transactions  in  which  no  altruism  is  present,  inter- 
est in  certain  cases  may  be  nil  or  even  negative.  Under 
present  conditions  the  banks  hold,  on  the  whole,  large 
sums  of  money  without  interest,  e.g.  the  balances  of  cur- 
rent accounts.  In  the  origins  of  banking  it  was  not  un- 
common for  the  depositors  to  pay  something  for  safe 
custody.  As  soon  as  we  pass  from  money  to  things,  nega- 
tive interest  in  particular  cases  becomes  quite  common ; 
e.g.  a  business  may  be  run  at  a  loss,  and  a  creditor  may 
bear  some  of  the  loss,  and  even  send  good  money  after  bad 


PROFITS  177 

to  provide  more  capital,  in  the  hope  that  ultimately  the 
negative  interest  may  be  balanced  by  future  gains. 

Leaving  for  the  present  the  element  of  risk,  we  may  next 
observe  that  although,  on  the  wliole,  in  modern  commercial 
transactions  loans  of  money  and  of  capital  in  other  forms 
yield  interest,  it  by  no  means  follows  that  money  or  capi- 
tal, if  not  lent,  will  also  yield  interest. 

Money  itself  is  obviously  as  barren  now,  as  the  wisdom 
of  the  Bible  and  Aristotle  declared  it  to  be  in  old  times. 
And  although  it  is  usual  to  reckon  that  part  of  the  profits 
of  a  business  that  corresponds  to  the  current  rate  of  inter- 
est as  interest  on  the  capital  invested  in  the  business,  it  is 
clear  that  this  profit-interest,  as  it  may  be  termed,  is  on 
quite  a  different  footing  from  loan-interest.  The  mere  fact 
of  the  employment  of  capital  does  not  assure  interest  to  the 
employer  anymore  than  the  mere  possession  of  capital  assures 
interest  to  the  possessor.  The  interest  on  production-capital 
must  be  earned ;  that  is  to  say,  it  must  be  produced  out  of 
the  sale  of  products  above  the  price  of  the  other  elements 
of  cost. 

Passing  from  particular  cases,  which  are  only  of  use  to 
clarify  ideas,  it  is  possible,  even  when  we  take  a  country  as 
a  whole,  that  after  allowing  for  the  other  elements  in 
profits,  the  rate  of  profit-interest  may  fall  far  below  the 
level  of  loan-interest.  Loan-interest  may  be  obtained 
from  abroad  or  from  taxes ;  but  the  capital  of  a  country, 
already  fixed  and  specialised,  cannot  be  sent  abroad  or 
advanced  to  the  state.  In  the  course  of  time,  however, 
the  absence  of  interest  would  affect  the  national  production- 
capital,  as  it  does  that  of  a  particular  trade,  and  on  the 
capital  left  interest  will  again  arise. 


178  ELEMENTS  OF  POLITICAL  ECONOMY 

It  may  be  thought  that  capital,  as  a  whole,  would  refuse 
to  lend  its  services  to  labour  as  a  whole,  unless  it  obtained 
interest.  But  no  such  combination  of  capital  can  exist 
under  competition,  and  even  if  there  were  a  perfect  monop- 
oly on  the  part  of  capital,  interest  as  such  might  not  be 
forthcoming.  Under  certain  conditions  even  monopolists 
may  have  to  sell  at  a  loss. 

In  modern  industrial  countries,  however,  it  may  be 
easily  shown  that  the  capital  invested  in  productive  un- 
dertakings as  a  whole  does  yield  interest  over  and  above 
insurance  for  depreciation  and  wages  of  management, — 
namely,  by  reference  to  the  growth  of  joint  stock  enter- 
prise. In  industrial  companies,  as  a  rule,  the  interest  ele- 
ment can  be  taken  separately,  and  such  undertakings  on 
the  whole  yield  profit-interest  that  corresponds  to  the 
current  loan-interest,  besides  the  other  elements  of  profits. 
The  tendency  of  all  modern  industry  is  to  work  more  and 
more  with  borrowed  capital. 

3,  Insurance  against  Risk.  — The  element  of  risk  may  first 
of  all  be  considered  in  the  case  of  ?c»a/i-interest.  "  High 
interest  means  bad  security  ;  "  it  is,  however,  generally 
assumed  that  a  number  of  risky  securities  may  on  the 
average  give  a  perfectly  safe  return.  Whether  this  is 
actually  the  case  in  any  society  at  any  time  or  over  a 
series  of  years,  depends  on  the  resultant  of  conflicting 
causes.  If  we  take  as  representative  of  loans  the  invest- 
ments of  the  public  in  stock  exchange  securities,  it  appears 
that  the  chance  of  high  gains  is  generally  as  much  over- 
estimated as  in  ordinary  gambling. 

All,  then,  that  we  are  entitled  to  say,  is  that  there  is  a 
tendency  to  equality  in  loaji-intoTGSt  proper,  after  allow- 


PROFITS  179 

ance  is  made  for  risk ;  and  like  all  other  economic 
tendencies  it  is  liable  to  be  counteracted. 

When  we  turn  to  risk  as  it  is  found  in  j^ro/^interest, 
the  difficulties  of  computation  increase  and  the  tendency 
to  equality  is  subject  to  more  disturbing  elements.  In 
some  trades  the  risk  element  can  be  partially  separated  and 
allowed  for  by  way  of  insurance ;  e.g.  in  shipping,  both 
ship  and  cargo  may  be  insured ;  but  there  is  no  insurance 
against  the  loss  through  a  fall  in  freights  or  a  lack  of 
orders.  Risks  of  this  kind  can  only  be  met  by  a  higher 
profit  in  good  years  to  balance  the  losses  of  the  lean 
years.  It  is  impossible  to  determine  by  any  general 
principle  whether  on  the  whole  the  uncertain  trades  will 
effect  their  own  insurance.  There  may  be  great  risk  to 
individuals  in  a  trade  and  little  risk  to  the  aggregate 
capital  employed  in  that  trade,  as  shown  in  the  history  of 
banking.  In  some  cases,  however,  there  may  be  a  con- 
tinuous loss  of  capital  on  the  whole,  which  is  only  made 
good  from  other  funds,  as  is  well  illustrated  in  many 
mining  industries.  No  one,  it  is  said,  can  make  money 
out  of  a  Cornish  mine  but  a  Cornish  man,  and  he  only 
does  so  by  selling  it. 

The  risk  factor  has  been  surmounted  in  two  ways  in 
joint  stock  enterprise :  investors  have  been  able  to  divide 
their  risks  and  thus  apply  the  methods  of  insurance,  and 
the  princii)le  of  limited  liability  lias  made  such  a  division 
of  risks  still  more  practicable  and  certain.  It  has  some- 
times been  supposed  that  if  tlie  risks  of  capital  are  very 
great  in  any  country,  owing  to  general  insecurity,  a  high 
return  is  necessary  for  accumulation  to  take  place  at  all. 
But  the  truth  rather  is  that  insecurity  checks  the  accumu- 


180  ELEMENTS   OF   POLITICAL   ECONOMY 

lation  of  capital  directly,  and,  taking  a  broad  view,  with 
general  insecurity  through  bad  government  there  is  less 
to  divide  between  capital  and  labour,  and  both  may  suffer 
at  once.  There  is  no  effective  insurance  against  the  risks 
of  a  state  of  general  insecurity.  In  such  a  state  of  things, 
when  account  is  taken  of  all  the  losses  of  capital,  the 
aggregate  gross  profit  will  not  suffice  to  cover  the  actual 
depreciation,  and  the  whole  country  becomes  impoverished. 

4.  Wages  of  Management. — Capital  to  be  continuously 
employed  must  yield  something  more  than  interest  and 
compensation  for  risk.  Otherwise  every  one  would  try  to 
lend  simply  and  get  the  same  income  without  any  trouble. 
As  shown  in  economic  history,  this  sometimes  happens  on  a 
large  scale  and  a  wliole  nation  becomes  a  lending  state. 
When  we  take  an  isolated  country,  however,  if  many 
people  try  to  lend  instead  of  employing  their  capital  in 
business,  the  rate  of  interest  must  fall,  and  in  this  way  an 
encouragement  will  be  again  given  to  trade  and  produc- 
tion, and  a  margin  will  appear  for  wages  of  manage- 
ment. 

The  element  of  earnings  of  management  as  distinguished 
from  other  elements  in  gross  profits  is  best  seen  in  the  case 
of  joint  stock  companies.  The  debenture  holders  receive 
the  pure  interest;  the  deferred  shareholders  receive  the 
reward  for  risk,  not  allowed  for  in  actual  insurance,  and 
the  managers  and  directors  receive  a  kind  of  wages  for  the 
labour  of  inspection  and  direction. 

In  the  case  of  companies  these  charges  will  be  on  the 
same  footing  as  the  other  higher  forms  of  wages. 

The  rates  of  remuneration  of  the  managers  will  in 
general  not  be  exactly  proportioned  to  the  magnitude  of 


PROFITS  181 

the  capital  engaged.  The  hirger  the  business  no  doubt 
the  higher  the  manager  will  be  paid,  but  in  no  definite 
proportion.  If,  instead  of  estimating  earnings  of  manage- 
ment by  the  salaries  supposed  to  be  earned  (say)  in  a  year, 
we  were  to  estimate  them  by  the  rate  per  cent  of  the  capi- 
tal engaged,  this  want  of  proportion  becomes  still  more 
marked.  It  is  the  smallest  businesses  that  always  appear 
to  pay  the  highest  rates  of  profit,  simply  because  the  wages 
of  management  are  so  high  relatively  to  the  capital  em- 
ployed. The  diminution  of  this  expense  is  no  doubt  a 
strong  factor  in  the  tendency  to  amalgamation  of  all  kinds 
of  capital  already  examined. 

Wages  of  management,  taken  strictly  and  separated 
from  other  elements  in  profits,  are  subject  to  the  relative 
causes  that  determine  the  differences  in  other  forms 
of  wages  (see  last  chapter).  The  special  characteristics 
of  the  earnings  of  management  have  been  admirably 
worked  out  by  Professor  Marshall. ^ 

5.  The  Reward  of  Enterprise  and  Good  Fortune.  —  There 
is  an  element  in  gross  profits  which  cannot  be  properly 
placed  under  any  of  the  three  headings  already  noticed. 
It  is  so  much  the  peculiar  characteristic  of  profits  that 
in  certain  cases  it  overshadows  the  rest.  It  is,  in  fact, 
the  reward  of  enterprise  and  good  fortune.  Enterprise, 
in  the  highest  forms,  is  a  combination  of  exceptional 
ability  with  exceptional  risk.  The  ability  is  of  the  kind 
that  defies  definition ;  it  is  analogous  to  the  genius  of 
the  soldier  as  distinguished  from  the  knowledge  of  the 
military  student.  It  demands  at  the  same  time  stubborn 
perseverance  in  what  seems  hopeless  waste  of  energy 
1  Principles,  Book  IV,  Chap.  XII ;  Book  VI,  Chaps.  VII  and  VIII. 


182  ELEMENTS  OF  POLITICAL  ECONOMY 

and  also  tlie  utmost  readiness  to  adopt  changes  in  re- 
sponse to  tlie  opportunities  of  good  fortune.  The  risks 
in  these  exceptional  cases  may  be  far  beyond  those  of 
any  actual  calculation :  a  man  may  risk  the  whole  of 
his  capital,  and,  besides,  all  that  he  can  borrow  on  the 
chance  or  the  hope  of  success.  It  is  enterprise  of  this 
kind  that  has  played  the  greatest  part  in  economic 
progress ;  it  is  the  necessary  practical  complement  to 
the  discoveries  of  tlie  creative  genius  in  science. 

Enterprise  of  less  degree  but  similar  in  kind  may  also 
appear  in  old-established  industries,  as  in  the  adoption 
of  better  organisation,  or  improved  processes,  or  minor 
economies.  This  element  in  profits  is  in  some  re- 
spects analogous  to  economic  rent,  in  others  to  quasi- 
rent.^ 

6.  The  Tendency  of  Profits  to  Equality.  —  In  the  light 
of  this  analysis  it  is  clear  that  we  cannot  speak  of  any 
general  tendency  of  gross  profits  to  equality,  in  the 
sense  that,  if  we  take  a  long  enough  period,  the  average 
gross  profits  on  all  employments  of  capital  tend  to  be 
equal.  All  that  we  are  entitled  to  say  is,  that  if  any 
of  the  elements  in  profits  is  above  the  average,  having 
regard  to  the  special  causes  of  difference,  such  a  rate 
is  unstable  (and  conversely  of  low  rates).  In  the  case 
of  interest  (after  allowing  for  risk)  the  instability  of 
exceptional  rates  is  felt  most  quickly  ;  in  management 
proper,  exceptional  rates  of  wages  are  also  unstable, 
though  the  period  of  readjustment  is  longer ;  whilst, 
in  the  last  element  examined,  namely  entei'prise,  the 
exceptional  gains  will  provoke  imitation  and  competition, 
1  Of.  Marshall,  Principles  (4th  ed.),  p.  601  n. 


PROFITS  183 

but  the  exceptional  reward  of  the  first  promoters  will 
not  be  obtained  by  his  followers.  True  enterprise, 
however,  will  appear  again  in  other  forms  and  places, 
and  the  knowledge  that  in  former  instances  these  great 
rewards  have  been  obtained,  will  stimulate  enterprise  of 
all  kinds.  Good  fortune  in  trade  and  in  war,  as  the 
name  implies,  is  not  to  be  averaged. 

Throughout  this  treatment  of  profits  it  has  been 
assumed  that  competition  is  the  prevailing  influence. 
The  exceptional  gains  derived  from  monopolies  can 
only  be  explained  after  the  theory  of  value. 

7.  The  General  Rate  of  Profits.  —  Since  gross  profits 
are  analysed  into  elements  that  depend  proximately  on 
different  causes  (^e.g.  interest  and  wages),  and  are 
measured  in  different  ways,  it  is  not  easy  to  form  a 
conception  of  a  general  rate  of  profits.  Interest  measured 
per  cent  may  be  falling,  whilst  wages  of  management 
reckoned  per  caput  may  be  rising.  We  can,  however, 
easily  form  an  idea  of  a  general  rate  of  interest,  and 
of  a  general  rate  of  wages  of  management  when  taken 
separately.  Such  conceptions  are  useful  in  the  theory 
of  value,  and  also  in  considering  the  nature  and  results 
of  economic  progress. 

When  we  are  considering  the  general  distribution  of 
wealth,  we  may,  for  certain  purposes,  put  together  the 
total  earnings  of  capital,  including  interest,  wages  of  man- 
agement, and  also  the  rewards  of  enterprise,  and  com- 
pare them  with  the  earnings  of  labour,  in  the  sense  of 
ordinary  manual  labour;  and  with  this  interpretation 
we  compare  the  aggregate  earnings  of  capital  and  labour, 
and  consider  under   what   conditions   the   one   may   rise 


184  ELEMENTS  OF  POLITICAL  ECONOMY 

at  the  expense  of  the  other.  Questions  of  this  kind  arise 
in  dealing  with  socialism  and  also  in  treating  of  some 
of  the  ulterior  effects  of  trade  unions,  cooperation,  etc.^ 

1  Marshall,  Principles,  Book  IV,  Chaps.  XII  and  XIII ;  Book  VI, 
Chaps.  VI-VIII ;  Hadley,  Economics,  Chap.  IX  ;  Sidgwick,  Principles, 
Book  II,  Chap.  IX,  §  3 ;  Walker,  Political  Economy ;  Cannan,  Pro- 
duction and  Distribution;  Pierson,  Principles,  Part  I,  Chap.  V. 


CHAPTER   IX 

HARMONIES   AKD   CONFLICTS    OF    LABOUR    AND    CAPITAL 

1.  Relations  of  Labour  and  Capital  in  General.  —  In  the 
present  chapter  the  terms  labour  and  capital  will  be  taken 
in  the  restricted  popular  meaning;  that  is  to  say,  labour 
is  only  that  hired  by  the  employer  of  production-capital 
with  the  view  to  a  profit.  The  term  labour  is  further 
restricted  to  ordinary  labour,  thus  excluding  the  higher 
professional  labour  which  is  also  hired  by  the  undertakers 
of  business,  and  also  the  various  forms  of  the  labour  of 
direction  and  inspection. 

As  already  shown  in  the  analysis  of  wages,  it  is  to  the 
economic  interest  of  the  worker  to  give  a  minimum  quan- 
tity of  labour  (subjective)  for  a  maximum  real  reward  ; 
and  it  is  to  the  interest  of  the  employer  to  obtain  a  maxi- 
mum of  work  (objective)  at  a  minimum  real  cost  to 
himself.  Thus  the  elements  of  conflict  are  always  present 
and  are  generally  intensified  by  prejudice,  and  want  of 
appreciation  of  the  harmony  of  interests  in  many  re- 
spects. To  take  the  simplest  case :  the  worker  naturally 
wishes  to  work  fewer  hours  a  day  for  higher  wages,  whilst 
the  employer  would  like  more  hours'  work  for  less  wages ; 
the  former  is  apt  to  forget  that  wages  after  a  certain 
point  must  fall  if  hours  are  reduced,  because  the  product 
must  fall  off,  whilst  the  latter  does  not  allow  enough  in 
many  cases  for  the  increased  efficiency  of   shorter  hours 

185 


186  ELEMENTS  OF  TOLITICAL  ECONOMY 

and  better  pay.  There  are,  however,  in  any  case  real 
divergences  of  interests ;  or,  in  the  popular  phrase,  real 
conflicts  of  labour  and  capital. 

2.  Conflicts  of  Interests ;  Origin  of  Trade  Unions.  — 
There  is  not  one  of  the  elements  that  go  to  make  up  a 
"  quantity  of  labour "  that  may  not  give  rise  to  an  ap- 
parent if  not  real  conflict  of  interests ;  and  this  is  equally 
true  of  the  corresponding  real  reward. 

During  the  nineteenth  century  the  conflict  of  interests 
has  been  forcibly  illustrated  by  the  history  of  trade 
unions.  With  reference  to  this  history,  only  the  main 
lines  of  inquiry  can  here  be  indicated. 

The  connection  of  the  trade  unions  with  the  craft  gilds 
is  one  of  analogy,  not  of  descent.  And  the  points  of 
analogy  must  not  be  overstrained.  The  craft  gilds  in 
mediaeval  England  did  not  originate,  according  to  the 
view  which  Brentano  had  at  one  time  made  popular,  from 
conflicts  between  labour  and  capital  such  as  arise  in 
modern  times  with  large  production.  Nor  is  there  much 
foundation  for  the  wider  contention  of  Brentano  that 
the  weak  alwaj's  resort  to  combination,  and  the  strong 
to  competition  —  witness  the  modern  trust.  The  chief 
point  to  notice  as  regards  the  craft  gilds,  as  bearing  on 
trade  unions,  is  that  what  was  evil  in  them  (and  the 
chief  cause  of  their  decay)  was  due  to  the  tendency  to 
monopoly,  which  they  soon  revealed,  and  what  M-as  sup- 
posed to  be  of  real  public  benefit  Avas  transferred  from 
the  gild  regulations  to  the  statute  book  (Statute  of 
Apprenticeship,  1563).  These  regulations  and  the  cus- 
toms to  which  they  gave  expression  dominated  the  wage 
system   of   the    country   until   the   industrial   revolution. 


LABOUR  AND   CAPITAL  187 

When  this  customary  order  broke  down,  the  relations  of 
labour  and  capital  became  utterly  disorganised,  to  the 
great  detriment  of  the  working  classes ;  and  it  was  to 
remedy  these  abuses  that  trade  unions  were  formed. 
They  were  from  the  first  associations  of  labour.  The 
craft  gilds  in  England,  on  the  other  hand,  were  local 
bodies  under  the  local  authority  of  the  town,  though  at 
first  they  occasionally  derived  their  authority  from  the 
king  or  lord  of  the  manor.  Their  ostensible  objects  were 
to  benefit  the  public  by  securing  good  work  and  materials, 
and  the  master  was  responsible  for  the  good  upbringing  of 
his  apprentices,  who  in  turn  might  hope  to  become  masters. 

During  the  early  years  of  the  nineteenth  century  the 
trade  unions  were  subject  to  severe  legal  restraints  and 
disabilities,  and  in  general  were  held  up  to  popular  odium 
by  the  press  and  those  who  sought  to  guide  popular 
opinion ;  they  were  written  down  as  anarchist  secret 
societies  that  sought  for  the  ruin  of  capital  and  industry. 
At  present  the  pendulum  has  swung  to  the  other  ex- 
treme, though  there  are  still  survivals  of  old  prejudices. 
In  considering  the  economic  functions  of  trade  unions,  it 
is  most  important  to  distinguish  between  their  normal 
actions  in  normal  times,  and  their  actions  in  strikes  and 
times  of  acute  conflict. 

3.  Functions  of  Trade  Unions.  —  Trade  unions  are  vol- 
untary associations  of  labour  for  mutual  assistance,  pro- 
tection, and  benefit.  Their  objects  are  (in  the  phraseology 
here  used)  to  diminish  the  quantity  of  labour  involved 
in  work  and  to  increase  the  real  reward ;  they  are  de- 
signed to  add  to  the  power  of  labour  in  making  bargains 
by  the  substitution  of  combination  for  competition. 


188  ELEMENTS  OF  POLITICAL  ECONOMY 

It  is  clear  from  this  wide  definition  that  there  are  many 
ways  in  which  the  unions  may  seek  to  interfere  with 
the  conditions  of  employment;  and  conflicts  arise,  some- 
times pushed  to  the  extreme  of  a  strike,  that  have  noth- 
ing to  do  with  money  wages.  The  unions  also  in  many 
cases  perform  the  functions  of  benefit  or  insurance  soci- 
eties, and  of  bureaus  for  the  organisation  and  employ- 
ment of  labour.  Their  object  has  been  described  in 
sympathetic  language  as  to  elevate  the  social  position 
of  the  members  (Webb).  In  the  present  work  the  at- 
tention must  in  the  main  be  confined  to  the  influence  of 
the  unions  (in  relation  to  associations  of  employers)  in 
fixing  money  wages  and  earnings.  From  this  point  of 
view  it  will  be  necessary  to  consider  not  only  their 
effects  on  particular  wages,  but  also  their  effects  on  what 
may  be  called  the  general  rate  of  wages.  The  object  of 
trade  unions,  as  regards  money  wages,  is  to  raise  them 
above  the  rate  that  they  would  attain  under  "natural" 
conditions  and  competition.  The  fundamental  assump- 
tion is  that  combinations  of  labour  can  make  better  bar- 
gains than  labourers  in  isolation. 

Such  a  rise  above  the  competition  rate  may  be  effected 
in  one  or  other  of  three  ways :  at  the  expense  of  the  con- 
sumer of  the  product ;  at  the  expense  of  other  wages ;  at 
the  expense  of  profits. 

4.  Wages  and  the  Consumer.  —  A  rise  of  wages  at  the 
expense  of  the  consumer  of  the  particular  product  implies 
that  the  particular  class  of  labour  considered  can  in  effect 
obtain  a  monopoly  price  without  checking  too  much  the 
demand  for  the  commodity.  The  conditions  to  make  such 
a   combination   effective   are :    that   other  labour  can  be 


LABOUR   AND  CAPITAL  189 

excluded,  and  that  machinery  cannot  take  the  place  of 
labour;  in  brief,  there  must  be  an  effective  limitation  of 
the  supply  of  one  of  the  requisites  of  production.  Next, 
from  the  point  of  view  of  demand,  there  must  be  on  the 
part  of  the  consumer  a  non-elastic  demand  so  that  a  rise  in 
price  will  have  little  effect  on  the  quantity  demanded  ; 
there  must  also  be  an  absence  of  acceptable  substitutes. 
If  the  labour  in  question  is  necessary,  but  of  small  value  in 
comparison  with  the  total  product,  a  considerable  rise  of 
wages  might  take  place  without  any  appreciable  effect  on 
the  total  price  and  the  demand,  and  if  the  other  factors  of 
production  are  relatively  weak  in  bargaining  power,  then 
also  the  rise  of  wages  is  so  much  the  more  easily  made  in 
the  fortunate  group. 

Favourable  conditions  of  this  kind  would  be  offered  if  in 
any  locality  there  were  a  sudden  and  great  demand  for 
houses.  In  this  case  there  is  no  effective  substitute,  and  a 
considerable  rise  in  price  might  have  little  immediate 
effect  on  the  demand.  Thus,  if  other  labour  could  be 
excluded,  the  local  house  builders  might  force  a  rise  at  the 
expense  of  the  consumer  of  the  houses.  Any  particular 
branch  of  labour  required  that  happened  to  have  a  very 
effective  union  (and  the  sympathy  of  the  members  of  the 
trade  throughout  the  country)  might  raise  its  particular 
wages  still  more  in  proportion  to  the  other  trades  engaged 
in  building.  It  is  plain  that  such  conditions  as  those  indi- 
cated are  not  likely  to  occur  generally,  or  to  continue  for 
any  time.  Suppose,  then,  that  these  favourable  conditions 
are  absent,  and  yet  that,  for  the  time  being,  a  rise  of  wages 
is  effected  by  a  strong  combination  in  some  group  of  labour 
at  the  expense  of  the  consumer  of  the  product.     If  the 


190  ELEMENTS  OF  POLITICAL  ECONOMY 

rate  of  wages  is  above  the  "  natural "  rate,  tliat  is  having 
regard  to  the  conditions  of  the  employment,  etc.,  labour 
will  be  attracted  to  that  group,  and  the  children  available 
will  be  kept  in  that  trade.  Thus  it  will  be  difficult  to 
regulate  or  control  the  supply  of  labour.  If  the  rate  of 
pay  is  kept  up,  the  annual  earnings  must  fall,  unless  there 
is  an  increase  in  the  demand  for  the  commodity. 

But  when  we  turn  to  demand,  in  general  the  rise  in 
price  will  check  the  demand  and  will  encourage  the  use  of 
substitutes  and  economies,  and  thus,  on  the  whole,  the  field 
for  employment  will  be  lessened. 

Some  of  the  indirect  effects  may  be  noticed  if  the  article 
raised  in  price  is  widely  consumed  directly,  and  indirectly 
in  other  forms  of  production,  e.g.  coal. 

The  rise  in  price  is  equivalent  to  a  tax  on  a  necessary, 
and  falls  most  severely  on  the  poorest;  it  is  equivalent 
also  to  a  tax  on  the  raw  material  of  manufactures  or  the 
motive  power,  and  the  consequent  rise  in  price  again  taxes 
the  home  consumer.  It  will  tend  also  to  check  exports 
and  indirectly  to  check  the  imports  sent  in  return  for  the 
exports.  Thus  there  is  so  far  a  tax  both  on  the  productive 
power  and  on  the  consuming  power  of  the  nation  at  large. 

If,  to  carry  the  argument  a  stage  further,  a  similar  policy 
is  attempted  by  all  the  important  trades,  and  an  attempt  is 
made  to  raise  all  wages  at  the  expense  of  the  consumer  in 
general,  the  effect  is  so  far  obviously  suicidal  because  the 
labourers  themselves  constitute  the  great  mass  of  con- 
sumers. Such  a  policy  also,  in  view  of  the  effects  of  unre- 
strained foreign  competition,  would  probably  lead  to  a 
demand  for  protection. 

The  conclusion  then  appears  to  be  that,  although  wages 


LABOUR  AXD  CAPITAL  191 

and  earnings  may  in  exceptional  circumstances  rise  at  the 
expense  of  the  consumer  througli  the  action  of  a  strong 
union,  a  general  rise  at  the  expense  of  the  general  consumer 
would  lower  real  wages  by  a  still  greater  amount. 

5.  Wages  and  Profits.  —  The  next  question  is  :  Can 
wages  be  raised  above  the  competition  rate  at  the  expense 
of  profits  ? 

As  regards  any  particular  trade,  if  the  profits  are  struck 
at  more  than  in  other  trades,  capital  will  tend  to  leave  that 
trade  or  will  not  be  replaced.  Accordingly,  under  the 
ordinary  conditions  of  competition,  a  rise  of  wages  at  the 
expense  of  the  particular  profits  concerned  would  lead  to  a 
lessened  demand  for  labour ;  and  if  the  rate  of  wages  were 
kept  up,  still  the  annual  earnings  would  fall.  If,  however, 
the  trade  that  was  attacked  by  the  union  had  been  obtain- 
ing exceptional  or  monopoly  profits,  a  considerable  rise  of 
wages  might  be  effected  without  lessening  the  demand  for 
the  labour  in  question. 

When  we  consider  the  possibility  of  a  rise  in  general 
wages  at  the  expense  of  general  profits,  the  case  is  in  one 
important  respect  essentially  different  from  that  of  a  par- 
ticular trade  under  competition.  If  all  capital  is  struck  at 
simultaneously,  the  owners  cannot  indemnify  themselves  by 
transferring  the  capital  to  other  trades.  And  if  capital  is 
sent  abroad,  it  will  only  earn  interest  (and  not  wages  of 
management)  unless  the  owner  also  emigrates.  Accord- 
ingly, to  some  extent,  it  seems  that  general  wages  may  be 
raised  by  strong  unions  at  the  expense  of  general  profits. 
There  can  be  little  doubt  that  if  the  unions  had  been 
stronger  in  the  beginning  of  the  nineteenth  century,  such 
a  rise  might  have  been  effected,  and  in  all  probability  the 


192  ELEMENTS   OF   POLITICAL   ECONOMY 

general  rate  of  wages  in  the  second  half  of  that  century 
has  been  raised  through  the  unions.  At  the  same  time  the 
fallacy  of  post  hoe  ergo  propter  hoc  must  be  avoided.  Dur- 
ing the  same  period  wages  in  agriculture  have  risen,  and 
the  wages  of  domestic  servants  have  risen  still  more ;  and 
in  these  cases  the  direct  action  of  trade  unions  has  been 
n'll^  and  even  the  indirect  effect  probably  not  very  great; 
though  no  doubt  if  unions  have  raised  other  wages,  there  is 
a  sympathetic  rise  in  occupations  not  directly  affected. 

It  is  always  difficult  to  separate  the  effect  due  to  one 
particular  cause  from  a  complex  result.  The  general 
growth  of  wealth,  due  to  improved  methods  of  production, 
would  of  itself  tend  to  raise  wages ;  and  conversely,  the 
restrictive  action  of  the  unions  might  to  some  extent  retard 
the  accumulation  of  capital,  and  thus  so  far  check  the 
natural  rise  in  wages. 

Again,  under  present  conditions  what  may  be  termed 
the  debatable  surplus  is  relatively  small.  From  the  sell- 
ing price  of  the  product  must  be  deducted  all  the  nec- 
essary expenses,  if  the  production  is  to  continue,  and 
amongst  these  are  to  be  enumerated  a  sufficient  amount 
to  cover  the  depreciation  and  wear  and  tear  of  capital, 
and  a  necessary  minimum  of  profits.  By  the  latter 
term  is  now  meant  no  more  than  such  an  amount  of 
profits  as  will  suffice  to  keep  up  the  supply  of  capital. 
No  doubt  also  amongst  the  necessary  expenses  must  be 
reckoned  wages  sufficient  to  keep  up  the  supply  of  labour; 
but  the  larger  the  amount  already  taken  by  labour  as  its 
living  wage,  so  much  the  more  is  the  debatable  surplus 
contracted.  Other  considerations  may  be  advanced  to 
support  this  line  of  argument.     Thus,  as  already  shown, 


CAPITAL  AND  LABOUR  193 

profit  is  complex,  and  we  may  consider  the  possible 
effects  of  trade  unions  on  each  of  the  elements  taken 
separately.  Profit-interest  is  so  closely  associated  with 
loan-interest  that  there  is  always  an  interaction  between 
the  two.  It  is  clear  that  trade  unions  can  have  little 
or  no  power  in  reducing  loan-interest,  and  thus  their 
influence  on  profit-interest  is  also  limited.  Again,  the 
present  rate  of  pure  interest  is  so  low  that  if  the  whole 
of  it  were  taken  from  productive  capital  it  could  not 
raise  wages  very  much.  The  element  of  insurance  against 
risk  ought  properly  to  be  included  in  the  expenses  of 
production,  just  as  the  replacement  of  wear  and  tear. 
Wages  of  management  seem  to  offer  a  better  object  for 
attack,  but  again  they  must  be  divided  into  two  parts. 
A  large  part  of  the  gross  wages  of  management  is  only 
the  "natural"  payment  for  professional  skill  of  a  high 
character,  and  may  be  said  to  be  earned  out  of  the 
greater  productiveness  of  industry  as  a  whole  under  the 
guidance  of  the  entrepreneur.  If  we  take  the  wages  of 
management  in  an  ascending  order,  from  the  wages  of 
foremen  and  the  heads  of  departments  up  to  the  highest 
organising  skill,  the  importance  of  this  factor  is  readily 
seen.  Any  attempt  to  transfer  this  part  of  the  wages 
of  management  to  ordinary  labour  would  probably  result 
in  a  fall  in  wages  through  the  check  to  efficiency.  There 
remains  the  smaller  part  of  wages  of  management  that 
is  of  the  nature  of  rent  or  quasi-rent.  This  is  the  part 
that  is  directly  most  open  to  attack,  and  as  a  rule  a 
share  in  any  good  fortune  that  befalls  the  industry  of  a 
country  can  be  taken  by  labour,  beyond  what  would  be 
obtained  by  the  natural  effects  of  competition,  provided 


194  ELEMENTS  OF  POLITICAL  ECONOMY 

the  labour  combinations  are  strong.  Similarly  as  regards 
the  effects  of  improvements,  part  of  the  benefit  may  be 
transferred  to  the  consumer  in  a  fall  of  price,  but  part 
may  be  retained  by  labour  at  the  expense  of  quasi-rents. 
In  this  case,  however,  the  indirect  effects  must  also  be 
taken  into  account.  It  is  the  hope  of  these  exceptional 
rewards  that  gives  such  a  stimulus  to  enterprise  on  the 
whole,  and  if  it  were  possible  for  ordinary  labour  to 
appropriate  every  gain  as  it  arises,  there  would  soon  be 
a  dearth  of  these  gains.  It  must  always  be  remembered 
that  competition  of  capital  for  labour  tends  to  raise 
wages,  and  the  object  of  trade  unions  is  to  raise  wages 
above  this  so-called  natural  rate.  The  unions  are  not 
able  to  affect  the  demand  for  labour  and  for  the  varied 
products  of  labour,  and  the  utmost  they  can  do  is  to  take 
advantage  of  favourable  conditions. 

The  influence  of  the  unions  is  best  seen  in  preventing 
a  fall  in  wages.  If  a  fall  is  rendered  really  necessary  by 
the  conditions  of  trade,  as  in  a  period  of  general  depres- 
sion, the  unions  can  only  keep  up  rates  of  wages  at  the 
expense  of  greater  losses  in  earnings.  But,  on  the  other 
hand,  any  economy  in  the  wages  bill  gives  so  great  a 
gain  to  profits  that  the  tendency  is  for  masters  to  reduce 
wages  whenever  occasion  offers.  At  present  the  chief 
object  of  unions  as  regards  money  wages  seems  to  be  to 
make  a  relatively  high  minimum  wage  a  necessary  condi- 
tion of  production,  just  as  certain  sanitary  conditions  are 
made  necessary.  It  is  maintained  by  those  who  approve 
of  this  policy,  that  the  other  parts  of  the  competitive 
system  will  be  left  unaffected,  and  that  on  the  whole 
the  efficiency  of  industry  will   be  increased   by  insisting 


CAPITAL  AND  LABOUR  195 

on  this  reasonable  minimum.  And  there  is  little  doubt 
that  a  continual  cheapening  of  labour  might  lead  to  deg- 
radation and  inefficiency,  whilst  in  a  narrow  sense  it  is 
to  the  interest  of  individual  employers  to  try  to  cheapen 
labour;  for  to  the  individual  the  gains  of  promoting  the 
general  welfare  of  labour  seem  too  far  off  compared  with 
the  present  gains  of  a  reduction  in  wages. 

6.  Evils  of  Conflicts  of  Labour  and  Capital.  —  In  disputes 
between  labour  and  capital,  with  trade  unions  on  one 
side  and  associations  of  employers  on  the  other,  the 
ultimate  appeal  is  to  a  strike  or  lockout.  It  is  easy  to 
show  that  the  direct  loss  incurred  during  a  strike  by  the 
loss  of  wages  may  take  years  to  recover  from,  even  if 
the  strike  is  successful.  The  amount  in  dispute  is  often 
not  more  than  five  per  cent;  but  suppose  that  it  is  as 
much  as  ten  per  cent,  and  the  strike  lasts  only  six  weeks. 
The  total  loss  of  wages  during  this  time  will  need  a  year 
to  effect  a  compensation,  if  the  strike  is  successful  —  and 
the  rise  is  retained.  If  the  percentage  in  dispute  is 
less  and  the  period  of  the  strike  is  longer,  so  much  longer 
Avill  be  the  period  requisite  for  compensation.  Apart 
from  the  direct  losses  of  the  strike  there  are  the  evil 
effects  on  the  families  of  the  workers  and  the  losses 
occasioned  by  forced  sales  and  debts.  On  the  side  of 
the  masters  there  is  no  actual  physical  distress,  and  there 
may  be  no  immediate  injury  to  most  of  the  fixed  capital ; 
but  there  are  great  losses  as  a  rule  through  the  disorgan- 
isation of  business  connection  and  the  openings  given 
to  foreign  competition.  The  masters  in  some  cases  have 
every  compensation  in  the  rise  in  prices  of  accumulated 
stocks  and  in  the  maintenance  of  prices  for  a  time,  even 


196  ELEMENTS  OF  POLITICAL  ECONOMY 

after  the  strike  has  ceased.  But  on  the  whole  a  strike 
or  lockout  involves  much  more  than  a  loss  of  profits 
during  the  time. 

In  a  general  view,  also,  account  must  be  taken  of  the  in- 
crease of  class  animosity  and  jealousy,  and  of  the  feeling  of 
insecurity  as  regards  enterprise,  which  in  the  end  will  ad- 
versely affect  the  general  productive  power  of  the  country. 

Accordingly,  everything  that  tends  to  substitute  the 
methods  of  industrial  peace  for  conflict,  other  things 
being  the  same,  is  a  national  gain. 

7.  The  Harmonies  of  Labour  and  Capital. — In  many 
cases  the  economic  interests  of  labour  and  capital  are 
only  in  apparent  conflict,  and  the  difficulty  is  for  the 
stronger  side  to  recognise  the  real  harmony.  There  can 
be  no  doubt  that  many  institutions,  laws,  and  customs, 
apparently  only  designed  in  the  interests  of  labour,  have 
been  indirectly  of  advantage  to  the  employer.  Improved 
conditions  of  work  have  increased  the  efficiency  of  labour. 
So  also,  on  the  whole,  has  the  rise  in  money  wages.  The 
economy  of  high  wages  expresses  a  great  truth,  especially 
when  we  regard  the  effects  from  the  national  standpoint. 

Even  as  regards  the  debatable  surplus,  methods  of 
conciliation  are  to  be  preferred  whenever  possible. 
Among  such  methods  may  be  noticed  first  of  all 
sliding  scales.  The  principle  of  the  sliding  scale  is  the 
recognition  of  the  connection  of  wages  and  prices.  The 
chief  difficulty  is  that  wages  is  not  the  only  element  in 
cost,  and  sometimes  is  not  the  most  important.  The 
price  of  the  product  may  rise  because  the  raw  material 
is  dearer,  or  the  coal.  Again,  there  are  difficulties  caused 
by  the  differences  in   qualities   and   in   the   methods   of 


CAPITAL  AND  LABOUR  197 

production.  Thus  it  has  been  said,  that  with  a  perfect 
sliding  scale,  a  different  scale  would  be  required  for  every 
mine.  The  great  advantage  of  this  method  is  that  it  is 
automatic,  if  once  the  scale  is  agreed  on,  and  the  mode 
of  ascertaining  the  movements  in  prices,  and  the  intervals 
at  which  the  readjustments  are  to  be  made,  have  been  settled. 

In  theory,  the  methods  of  so-called  industrial  partner- 
ship, or  profit-sharing,  or  "bonus"  grants,  seem  most 
attractive.  In  effect,  labour  is  supposed  to  create  the 
extra  profits  or  bonus  that  it  receives  by  greater  effi- 
ciency and  economies.  The  chief  difficulty  is  when 
with  falling  prices  the  bonus  disappears  and  the  workers 
think  it  is  a  case  of  mismanagement.  Industrial  partner- 
ships of  this  kind  do  not  imply,  as  a  rule,  any  share  in 
the  management  or  any  share  in  the  losses  (apart  from 
the  loss  of  the  bonus). 

A  development  of  this  system  is  found  when  an 
opportunity  is  given  to  the  workers  to  acquire  a  certain 
amount  of  shares  in  the  business  (Carnegie).  Here 
again  the  danger  is  in  the  risk  of  the  loss  of  the  capital 
in  bad  times. 

Lastly,  there  is  the  method  of  cooperation,  in  which, 
in  its  full  development,  the  workers  provide  both  the 
capital  and  the  business  management.  Cooperation  has 
had  an  immense  success  in  trade  as  distinguished  from 
production  in  the  narrow  sense.  But  although  recently 
there  has  been  some  increase  of  cooperative  production, 
the  aggregate  amount  in  the  industrial  world  is  of  little 
importance.  The  great  difficulty  seems  to  be  in  the 
management.  There  is  a  natural  reluctance  to  give  either 
sufficient  powers  or  sufficient  wages  to  the  managers. 


198  ELEMENTS  OF  POLITICAL  ECONOMY 

On  the  whole,  then,  it  seems  that  the  wage  system 
will  be  retained  and  the  difficulties  will  be  best  surmounted 
by  boards  of  conciliation  and  arbitration  adapted  to  the 
circumstances  of  particular  industries.  Boards  composed 
equally  of  masters  and  men,  with  an  independent  chair- 
man with  a  casting  vote,  or  with  some  provision  for 
reference  to  a  neutral  authority,  seem  to  have  worked 
well  over  long  periods.  The  difficult  question  then 
arises,  whether  arbitration  in  some  form  should  not  be 
made  compulsory,  especially  in  the  case  of  industries 
in  which  there  are  great  national  interests  at  stake  (e.^. 
railways,  shipping,  coal,  etc.).  An  adequate  opinion  on 
the  relative  merits,  and  the  difficulties  involved  in  these 
various  methods,  can  only  be  formed  after  a  careful 
inductive  inquiry.  General  principles  and  ideas  can 
only  give  guiding  clues. ^ 

1  The  theory  of  combination  of  labour  and  capital  as  connected  with 
the  theory  of  monopoly  value  is  treated  in  Principles,  Book  III,  Chap. 
VIII.  On  the  subject  of  this  chapter  there  is  a  vast  literature.  The 
History  of  Trade  Unions  and  Industrial  Democracy,  by  Mr.  and  Mrs. 
Webb,  give  the  latest  and  most  complete  realistic  treatment ;  Brentano, 
Gilds  and  Trade  Unions,  may  be  corrected  by  the  Gild  Merchant  of  Dr. 
Gross  ;  Industrial  Peace,  by  L.  L.  Price,  may  now  rank  as  a  standard 
work  ;  Marshall,  Economics  of  Industry,  Book  VI,  Chap.  XIII,  gives  an 
excellent  account  of  trade  unions ;  see  also  Hadley,  Economics,  Chaps. 
XI-XII ;  Oilman,  Profit-Sharing ;  Nicholson,  Strikes  and  Social  Prob- 
lems ;  Pierson,  Principles,  Part  I,  Chap.  VI,  §  2  ;  Sidgwick,  Principles, 
Book  II,  Chap.  X ;  the  older  ideas  are  well  stated  in  Holyoake,  History 
of  Cooperation  and  Conflicts  of  Labour  and  Capital. 


CHAPTER  X 

ECONOMIC   RENT 

1.   Different  Meanings  of  the   Term   Rent.  —  The   term 

rent  is  used  in  various  senses.  It  is  applied  to  the  total 
revenue  derived  by  the  owners  from  lands,  houses,  mines, 
forests,  fisheries,  and  various  other  forms  of  property.  In 
former  times  the  towns  paid  a  rent  to  the  king  for  their 
privileges  and  to  the  feudal  superior  for  their  markets. 
With  this  wide  extension  of  the  term,  rent  is  sometimes 
equivalent  to  the  interest  on  some  forms  of  capital ;  some- 
times it  includes  besides  interest  other  elements  of  profits ; 
rent  may  be  in  effect  a  payment  by  instalments  for  raw 
materials  or  minerals ;  it  may  be  a  tax  imposed  by  author- 
ity, or  the  result  of  a  monopoly  created  by  circumstances. 

In  separating  economic  rent  from  these  other  usages  it 
seems  best  to  begin  with  the  meaning  assigned  to  it  by 
Ricardo  in  dealing  with  the  rent  of  agricultural  land. 
This  was  the  meaning  for  a  long  time  so  generally  adopted 
that  the  pure  theory  of  economic  rent  was  known  alterna- 
tively as  the  Ricardian  theory. 

This  case  is  at  any  rate  of  importance  in  itself,  and  it  has 
the  advantage  of  bringing  out  with  great  clearness  the 
fundamental  conceptions  and  their  mutual  relations. 
When  once  these  leading  ideas  are  made  clear,  it  is  easy  to 
extend  the  theory  in  whole  or  in  part  to  similar  cases ; 
e.g.   to   houses,  mines,  fisheries,   etc.,  and  to  the   varied 

199 


200  ELEMENTS  OF  POLITICAL  ECONOMY 

forms  of  income  to  which  Professor  Marshall  has  assigned 
the  name  quasi-rent. 

To  begin  with,  the  primary  object  is  to  unfold  the  mean- 
ing of  the  theory,  and  for  this  purpose  all  the  non-essential 
features  must  be  abstracted.  Later  on,  in  dealing  with 
historical  or  practical  problems,  account  can  be  taken  as 
the  abstract  method  demands  of  various  disturbing  causes. 

In  the  abstract  method,  it  may  be  recalled,  we  start  with 
certain  propositions  that  are  obvious  in  themselves,  or  at 
any  rate  may  be  taken  for  granted.  Such  are  in  this  case 
the  law  of  diminishing  return  to  land  in  its  two  forms 
(intensive  and  extensive)  :  the  equality  of  prices  for  the 
same  produce  in  the  same  market,  and  the  tendency  to 
equality  of  profits  (or  better,  the  instability  of  exceptional 
rates). 

It  will  be  found  that  the  theory  assumes  different  forms ; 
but  the  following  may  be  taken  as  the  definition  of 
economic  rent  (in  the  case  of  agricultural  land). 

Economic  rent  is  the  differential  profit  that  arises  from 
differences  in  the  cost  of  production,  owing  to  differences 
in  permanent  natural  conditions. 

Ricardo  used  the  expression  yiatural  and  indestructible 
powers  of  the  soil,  and  he  did  not  bring  out  the  abstract 
nature  of  the  theory.  He  made  clear,  however,  one  of  the 
fundamental  assumptions  that  is  often  overlooked  or  mis- 
understood; namely,  that  the  same  amount  of  labour  and 
capital,  or  productive  power,  is  applied  under  different 
natural  conditions,  but  not  necessarily  to  the  same  amount 
of  land.  In  brief,  the  object  is  to  explain  not  the  differ- 
ences in  rent  per  acre,  but  the  differences  in  profits,  although 
no  doubt  greater  simplicity  may  be  attained  by  the  further 


ECONOMIC  RENT  201 

assumption  that  each  acre  of  land  requires  the  same  amount 
of  capital. 

2.   Economic   Rent    from   Extensive   Cultivation.  —  The 

theory  may  be  first  worked  out  with  the  law  of  diminish- 
ing return  in  its  extensive  form :  we  assume  that  there  are 
various  qualities  of  land,  and  that  the  better  qualities  are 
limited. 

Take,  for  simplicity,  a  new  country  dependent  on  its 
own  supplies  and  occupied  by  a  body  of  settlers.  At  first 
we  may  suppose  that  there  is  an  abundance  of  the  best  land 
and  that  it  is  practically  free.  In  this  case  only  the  best 
land  will  be  used,  and  the  produce  will  sell  so  as  to  just 
cover  (with  current  wages  and  profits)  the  expenses  of 
production.  It  cannot  sell  for  more  as  that  would  pro- 
voke competition,  and  there  is  plenty  of  good  land  avail- 
able. So  far,  there  is  no  differential  profit  and  thus  no 
economic  rent. 

As  population  increases  the  yield  from  the  best  land 
(the  methods  of  cultivation  remaining  the  same)  will  not 
meet  the  demand.  The  relative  scarcity  raises  price,  and 
at  this  higher  price  it  pays  to  resort  to  inferior  land.  Now 
the  same  amount  of  capital  yields  different  amounts  of 
produce  on  the  two  qualities  of  land ;  but  since  all  the 
produce  must  sell  at  the  same  price,  a  differential  profit 
emerges  from  the  better  land.  This  constitutes  economic 
rent  and  may  be  measured  in  produce  or  in  money.  (In 
theoretical  problems  both  measures  may  be  useful.)  The 
land  that  yields  no  rent  is  called  the  land  on  the  margin  of 
cultivation,  and  the  capital  that  yields  no  differential  profit 
is  the  marginal  capital. 

As  the  population  is  supposed  to  increase  still  more,  this 


202  ELEMENTS  OF  POLITICAL  ECONOMY 

second  quality  may  not  suffice  to  meet  the  demand;  in 
this  case  the  margin  is  again  extended  to  inferior  land,  and 
the  former  marginal  land  now  yields  a  rent  and  the  best 
land  a  higher  rent.  The  process  may  continue  indefinitely 
so  long  as  population  increases  and  there  remains  inferior 
land  to  be  taken  into  cultivation.  Under  these  supposi- 
tions there  is  always  some  land  on  the  margin  that  pays 
no  rent,  and  with  every  extension  of  the  margin  rent 
rises.  The  theory  as  so  far  developed  involves  three  main 
results  which  it  is  best  to  make  explicit. 

(a)  So  long  as  the  demand,  say  the  number  of 
people,  remains  the  same  and  tlie  methods  of  cultivation 
are  unchanged,  the  price  must  remain  high  and  the  eco- 
nomic rent  is  permanent.  In  the  case  of  other  things  in 
which  the  supply  can  be  increased  without  resort  to 
more  difficult  conditions,  an  extra  profit,  due  to  a  rise 
in  demand,  can  only  be  temporary. 

(5)  Rent  depends  on  price  and  not  price  on  rent. 
It  is  the  rise  in  price  that  pushes  out  the  margin. 

(e)  The  price  depends  on  the  most  expensive  portion 
necessary  to  satisfy  the  demand — that  is,  on  the  cost  of 
production  on  the  land  on  the  margin  that  pays  no  rent. 
Thus  again  we  see  that  rent  does  not  govern,  but  depends 
on  price  ;  and  the  price  depends  on  the  marginal  cost. 

3.  Economic  Rent  from  Situation.  —  It  is  easy  to  show 
that  advantages  of  situation  act  in  the  same  way  as 
degrees  of  fertility.  In  order  to  isolate  this  element, 
suppose  all  the  land  is  equally  fertile,  but  at  different 
distances  from  the  market.  At  first,  only  the  nearest 
land  is  used  ;  with  an  increase  of  demand  and  rise  of 
price,  it  will  pay  to  go  to   more   distant  land ;  the  rise 


ECONOMIC   RENT  203 

of  price  just  compensates  on  the  marginal  land  the  extra 
cost  of  carriage  of  materials  and  products,  and  the  nearer 
lands  can  pay  rent. 

4.  Economic  Rent  from  Intensive  Cultivation.  —  Suppose 
now  that  all  the  land  is  of  the  same  quality  and  equally 
distant  from  the  market.  If  the  land  is  as  abundant  as 
before,  there  is  no  rent ;  but  if  after  all  the  land  has  been 
taken  up,  it  is  desired  to  raise  more  produce,  in  response 
to  a  rise  in  demand  the  law  of  diminishing  return,  in 
its  intensive  form,  will  come  into  play.  More  capital 
will  be  applied  to  the  land,  but  there  will  be  a  diminish- 
ing return  per  unit.  The  idea  now  is,  that  if  the  last 
applications  of  capital  just  gives  ordinary  profit,  the 
prior  "doses"  must  give  more.  If,  however,  the  last  or 
marginal  dose  is  to  be  applied  year  after  year,  the  price 
must  remain  high.  Therefore  the  differential  profits  on 
these  prior  doses  must  arise  every  year,  and  the  economic 
rent  is  permanent  so  long  as  the  conditions  of  demand 
and  of  production  remain  the  same. 

It  is  this  form  of  economic  rent  that  generally  presents 
most  difficulty.  It  is  well  to  remember  that  the  marginal, 
or  last  dose  of  capital,  is  not  necessarily  the  last  in  time. 
It  may  be  in  the  form  of  extra  labour  in  cleaning  the  land 
whicli  in  time  would  be  first  expended.  The  separation 
of  the  "  doses  "  and  of  the  corresponding  returns,  though 
difficult  in  practice,  has  to  be  calculated  in  some  way ; 
that  is,  the  farmer  must  decide  on  the  intensity  of  the 
cultivation  that  will  pay,  and  stop  the  applications  of 
capital  at  the  margin  of  profitable  return.  In  theory,  the 
separation  is  seen  most  clearly  by  means  of  diagrams  (see 
end  of  this  chapter). 


204  ELEMENTS  OF  POLITICAL  ECONOMY 

5.  Economic  Rent  from  Scarcity.  —  Suppose  now  that 
all  the  land  is  equally  fertile  and  well  situated,  and 
that  the  conditions  of  cultivation  are  such  that  the  returns 
to  successive  doses  of  capital  are  equal;  that  is  to  say,  the 
law  of  diminishing  return  is  not  supposed  to  operate. 
As  before,  if  the  land  is  abundant,  there  is  no  rent,  but 
if  the  land  is  limited  and  scarce,  with  a  rise  in  demand, 
economic  rent  will  emerge.  The  produce  will  sell  at 
such  a  price  that  it  will  give  a  differential  profit  over 
the  ordinary  applications  of  capital  in  other  industries ; 
this  profit  will  be  permanent  so  long  as  the  conditions 
of  demand  and  production  remain  the  same ;  and  it  may 
be  ascribed  to  permanent  natural  conditions.  It  thus 
comes  under  the  definition  adopted  above  of  economic 
rent. 

The  chief  point  to  notice  is,  that  the  rent  in  this  case 
is  not  a  monopoly  rent ;  the  land  may  be  in  the  possession 
of  different  owners  in  competition  with  one  another,  and 
there  may  not  be  even  tacit  or  customary  combination. 
Scarcity  alone  is  not  enough  to  give  monopoly ;  all  things 
that  have  value  are  relatively  scarce. 

6.  Combination  of  the  Different  Forms  of  Economic  Rent.  — 
For  the  sake  of  clearness  in  the  exposition,  the  different 
forms  of  economic  rent  have  been  treated  separately.  We 
must  next  observe  that  in  practice  they  are  generally  com- 
bined. The  same  rise  in  price,  consequent  on  an  increase 
of  demand,  will  render  it  profitable  to  cultivate  the  old 
land  more  highly  and  also  to  resort  to  less  fertile  and 
more  distant  lands ;  and  after  a  certain  point  it  may 
happen  that  all  the  land  in  cultivation  will  yield  a 
scarcity  rent. 


ECOXOMIC  RENT  205 

Although  the  treatment  adopted  has  been  abstract,  it 
is  to  be  noted  that  all  the  causes  are  real  or  true  causes. 
A  good  practical  illustration  of  a  rise  in  rent  is  afforded 
by  England  in  the  early  years  of  the  nineteenth  century. 
Recently  in  England  we  have  had  an  example  of  a  fall 
in  agricultural  rent.  To  account  for  this  fall  in  rent, 
we  have  only  to  take  the  fall  in  the  price  of  produce  as 
given  ;  it  is  in  fact  due  to  foreign  competition.  In 
response  to  the  fall  in  price  the  margin  has  receded. 

In  the  exposition  of  the  theory  the  usual  plan  has 
been  followed  of  supposing  first  an  increase  in  population, 
and  as  a  consequence  an  extension  of  the  margin.  The 
theory,  however,  is  essentially  the  same  if  we  suppose 
that,  in  the  first  place  improvements  are  made  so  that 
there  is  a  greater  produce  at  the  same  cost.  To  begin 
with,  the  produce  will  fall  in  price;  but  if  the  fall  in 
price  stimulates  population,  the  price  will  again  rise  to 
its  former  level.  Under  these  circumstances  there  will 
be  first  a  fall  and  then  a  rise  in  rents. 

The  theory  of  the  effects  of  improvements  on  rents 
leads  to  some  difficult  problems  that  can  only  be  solved 
by  the  aid  of  diagrams  or  mathematics.  The  general 
principle  applied  is  that  improvements  counteract  the  law 
of  diminishing  return,  and  since  rent  in  most  forms  arises 
from  the  operation  of  this  law,  as  the  law  is  counteracted 
the  rent  falls.  The  improvements  are  of  course  supposed 
to  be  general ;  improvements  on  one  portion  of  land  only 
would  increase  its  particular  rent. 

The  general  effects  of  economic  progress  on  rent  are 
treated  in  the  fourth  book  in  the  plan  here  followed. 

So  far  only  the  elements  of  the  theory  of  value  have 


206  ELEMENTS  OF  rOLITICAL  ECONOMY 

been  assumed:  no  more  indeed  than  may  be  taken  for 
granted  after  the  exposition  already  given  of  wages  and 
profits.  At  a  later  stage  some  attention  must  be  given 
to  some  of  the  relations  of  rent  and  value  that  are  not 
so  obvious  (see  Book  III). 

7.  Rent  of  Non-agricultural  Land.  —  Land,  in  its  ex- 
tended meaning  in  economics,  is  held  to  cover  the  income 
from  natural  resources  in  general.  The  gross  rent  of 
mines  is  partly  payment  by  instalments  for  a  stock  of 
material  and  partly  a  differential  payment  for  relative 
advantages  in  position  or  working.  If  it  is  assumed 
that  there  is  a  continuous  gradation  of  mines  of  vary- 
ing degrees  of  productiveness  and  accessibility,  it  is  the 
marginal  cost  that  determines  the  price,  and  any  saving 
in  cost  in  the  more  easily  worked  mines  (including  trans- 
port) is  economic  rent.  It  differs  from  agricultural  rent 
in  that  it  is  not  permanent:  it  is  similar  in  that  dimin- 
ishing return  may  act  both  extensively  and  intensively ; 
more  distant  and  inferior  mines  may  be  worked,  and  in 
the  best  mine  more  costly  methods  of  extraction  may  be 
adopted. 

In  sea  fisheries  there  is  no  rent,  because  there  is  no 
appropriation.  When  appropriation  is  possible,  as  in  the 
case  of  salmon,  a  rent  arises.  In  this  case,  since  the  stock 
is  renewed  annually  by  natural  means,  the  rent  closely 
resembles  that  of  agricultural  land;  and  again  we  have 
extensive  and  intensive  diminishing  return. 

In  building  land,  we  have  the  best  example  of  the 
permanence  of  natural  qualities,  namely,  extension  and 
situation.  In  the  case  of  cities  with  widely  extended 
suburbs,  there  is  continuity  from  the  central  positions  that 


ECONOMIC  RENT 


207 


pay  enormous  rents,  to  the  land  on  the  margin  that  pays 
no  rent  (jwa  building)  or  only  the  equivalent  of  agricul- 
tural rent.  The  case  is  exactly  similar  to  that  of  agricul- 
tural rental  with  a  difference  only  in  the  kind  of  produce : 
the  kindly  fruits  of  the  earth  are  now  amenity  for  dwell- 
ing-places  and  advantages   in  business.     There   is   often 

y 


Fig.  1. 


Fia.  2. 


H       K 


Let  OA,  AB,  BC (Fig.  1)  be  three  equal  portions  of  land  or  "doses" 
of  capital.  Let  OE,  AG,  BK  be  their  respective  corn  product.  Then 
if  AB  is  the  marginal  portion  or  "dose,"  Rent  =  DF ;  while,  if  BC  is 
the  marginal  portion,  Rent  =  DL  +  FH. 

If,  as  in  Fig.  2,  we  take  the  portions  of  land  or  "  doses"  of  capital  to 
be  very  small,  then  corresponding  returns  become  lines,  the  ends  of 
which  form  a  curve.  If  the  M^^  be  taken  as  the  marginal  dose,  then 
Rent  equals  BPL. 

present  also  the  scarcity  element  which  as  before  must 
be  distinguished  from  monopoly.  If  commodities  are 
sold  at  the  same  price  in  shops  in  different  streets,  the 
higher  rent  in  some  is  to  be  ascribed  to  the  economies  pos- 
sible with  greater  and  more  continuous  custom.  If  the 
more  fashionable  neighbourhoods  exact  higher  prices, 
they  must  be  considered  in  part  only  as  payment  for  the 


208  ELEMENTS   OF   POLITICAL   ECONOMY 

thing,  and  in  part  as  payment  for  entry  to  the  locality : 
a  kind  of  tacit  or  customary  entrance  fee.  This  part  of 
the  price  is  naturally  transferred  to  the  owner  of  the 
locale  as  economic  rent. 

8.  Quasi-rent.  —  Quasi-rent  is  properly  taken  after  the 
theory  of  value.  It  resembles  true  economic  rent  in  that 
it  depends  on  price,  and  is  not  a  determinant  of  price. 
It  differs  in  that  it  is  not  due  to  natural  conditions,  and 
is  not  permanent,  but  tends  to  disappear  under  the  influ- 
ence of  competition. 

It  is  sometimes  useful  to  represent  economic  rent  by 
rectangles  as  well  as  by  the  usual  curves.  The  connec- 
tion of  rent  with  diminishing  return  is  well  shown  in 
Marshall's  Principles  (4th  ed.),  pp.  232-235.  The  leading 
ideas  are  brought  out  in  the  figures  given  above. ^ 

1  For  elementary  exposition  without  mathematics,  see  Walker,  Land 
and  its  Bent ;  in  Marshall's  Principles  (see  Index)  the  treatment  is  rather 
scattered  ;  Hadley,  Economics,  Chap.  IX  ;  Nicholson,  TenanVs  Gain  not 
Landlord's  Loss;  Pierson,  Principles^  Parti,  Chap.  II. 


BOOK   III 

EXCHANGE 


CHAPTER  I 

VALUE    AND    MARKETS 

1.  Exchange.  —  The  third  great  department  of  political 
economy  —  namely,  exchange  —  is  closely  related  to  the 
other  two.  With  the  progress  of  society  production  in- 
volves more  and  more  division  of  labour,  which  is  limited 
by  the  extent  of  the  market.  In  distribution,  also,  status 
and  custom  give  place  to  contract ;  and  contract  from  the 
economic  standpoint  also  involves  the  idea  of  exchange. 
At  the  same  time,  both  production  and  distribution  involve 
other  ideas  and  topics,  e.g.  population,  property,  etc.,  which 
are  only  indirectly  of  importance  in  this  third  department. 
In  exchange  the  fundamental  idea  is  value.,  and  the  main 
problems  are  the  relations  of  values.  The  first  requisite 
is  to  make  clear  the  conception  of  value. 

2.  Value.  —  The  term  value.,  as  was  pointed  out  by  Adam 
Smith  is  used  popularly  in  at  least  two  senses.  It  may 
mean  value  in  use  or  value  in  exchange.  To  say  that 
a  thing  has  value  in  use  is  to  say  that  it  has  utility.  As 
already  shown,  utility  is  the  widest  term  in  economics,  and 
accordingly  it  is  not  suited  for  specialisation  in  the  de- 
partment of  exchange.  Utility  is  a  complex  conception 
(e.g.  total  and  marginal  utility),  and  the  ideas  which  it 
involves  may  be  made  clear  by  reference  to  consumption 
and   production  without  bringing   in  exchange.      Utility 

211 


212  ELEMENTS  OF   POLITICAL   ECONOMY 

is  indeed  essential  to  exchange  value,  but  exchange  value 
is  not  essential  to  utility.  Again,  utility  is  subjective  in 
the  last  resort,  whilst  exchange  is  objective.  In  the  same 
market  at  the  same  time  every  one  pays  the  same  price 
for  the  same  thing,  but  the  utility  to  each  purchaser  may 
be  different.  Records  of  prices  are  actual  definite  facts 
like  the  readings  of  the  barometer  or  the  markings  of 
geological  strata,  but  there  is  no  such  objective  record 
of  utilities. 

At  the  same  time  the  very  idea  of  exchange  —  its  mo- 
tive power  —  is  the  gain  of  utility  ;  and  in  considering 
the  real  advantages  of  exchange  and  the  real  cost  in- 
volved we  are  thrown  back  on  the  fundamental  ideas  of 
utility  and  disutility. 

3.  Value  in  Exchange.  —  Exchange  value  implies  two 
things  at  least ;  value,  in  other  words,  is  a  relative  term : 
the  intrinsic  value  of  one  thing  can  only  mean  its  utility. 

The  exchange  value  of  a  thing  can  be  expressed  theo- 
retically, in  terms  of  any  other  thing  that  is  exchangeable. 

In  practice  in  modern  societies  the  other  thing  taken 
for  comparison  is  generally  standard  money.  In  this  case 
value  becomes  price.  The  question  then  arises :  Are  we 
to  say  that  exchange  value  is  always  to  mean  price  ?  and 
that  the  distinction  between  value  and  price  is  to  be  aban- 
doned? 

The  answer  is  that  in  some  important  problems  it  is 
necessary  to  contrast  the  prices  with  values  measured  in 
some  other  way. 

The  essential  thing  to  remember  is  that  value  is  a  purely 
relative  term;  it  expresses  the  rate  of  exchange  of  one 
thing  compared  with  one  or  more  other  things. 


VALUE   AND  MARKETS  213 

Theoretically,  we  may  express  the  value  of  any  one 
thing  in  terms  of  all  other  exchangeable  things  taken  to- 
gether. This  is  Mill's  idea.  The  value  of  a  thing  as 
distinct  from  its  price,  on  this  view,  is  its  general  pur- 
chasing power. 

This  conception  of  general  purchasing  power  proves  to 
be  unworkable  unless  we  introduce  the  idea  of  price ;  to 
find  out  the  general  purchasing  power  of  a  thing,  we  must 
usually  compare  its  price  with  the  general  level  of  prices. 
Rogers  compared  the  average  prices  of  a  large  number  of 
commodities  in  the  period  1400-1540  with  their  prices 
in  the  period  1540-1581,  and  he  found  that  everytliing 
except  glass  had  risen  in  price ;  here  it  might  be  said  that 
the  value  of  glass,  in  the  sense  of  its  general  purchasing 
power,  had  fallen. 

The  case,  however,  that  is  always  of  the  greatest  im- 
portance in  this  mode  of  estimating  value,  is  the  case  of 
money  itself.  It  is  often  of  importance  to  measure 
changes  in  the  purchasing  power  of  money  in  reference 
to  things  in  general.  Thus  the  depreciation  of  incon- 
vertible notes  may  be  measured  either  in  reference  to 
gold  or  in  reference  to  commodities. 

Again,  as  will  be  shown  in  the  theory  of  money,  the 
price  of  gold  is  fixed  by  law ;  its  value  in  terms  of  things 
is  constantly  changing.  To  find  the  changes  in  value  in 
this  sense,  we  take  certain  things  as  representative,  and 
from  the  movements  in  their  prices  we  estimate  (by  some 
method  of  index  numbers)  the  general  movement  in 
prices.  If  prices  measured  in  this  way  have  risen,  that 
means  the  value  of  gold  has  fallen ;  and  if  prices  have 
fallen,  the  value  of  gold  has  risen. 


214  ELEMENTS   OF  POLITICAL  ECONOMY 

From  the  mode  adopted  in  measuring  changes  in  the 
value  of  gold,  it  is  clear  that  we  are  not  entitled  to  argue 
that  the  change  in  value  has  been  uniform  throughout 
the  whole  range  of  commodities.  Thus  it  might  happen 
that  although  general  prices  as  estimated  by  the  index 
numbers  had  fallen,  several  of  the  things  of  importance 
in  workmen's  budgets  (^e.g.  house  rents),  had  risen ;  in 
this  case  it  might  happen  that  the  purchasing  power  of 
money  wages  had  actually  fallen  in  spite  of  the  rise  in 
the  value  of  gold. 

It  is  sometimes  convenient  to  express  the  value  of 
particular  things  in  reference  to  something  else  instead  of 
money.  Here  attention  may  be  called  to  the  fallacious 
idea  that  so  long  prevailed  that  there  was  something 
discoverable  that  by  nature  was  especially  adapted  to 
measure  values  as  distinct  from  prices  —  a  supposed  real 
measure  as  contrasted  with  money,  the  nominal  measure. 
Thus  Adam  Smith  speaks  of  real  and  nominal  price :  by 
nominal  price  he  means  value  in  terms  of  money ;  by  real 
price,  value  in  terms  of  labour.  The  distinction  is  some- 
times useful,  but  the  notion  that  value  in  terms  of  labour 
is  more  real  than  value  in  terms  of  some  other  thing  is 
quite  false. 

It  is  not  a  question  of  reality  but  of  methods  of  com- 
parison. ]M ill's  idea  that  the  proper  correlative  in  the 
expression  of  value  is  "  things  in  general,"  seems  to  imply 
that  this  is  the  one  real  meaning  of  value  ;  and  this  may 
be  said  also  of  recent  attempts  to  reduce  value  to  utility. 

The  point  to  grasp  is  that  for  different  purposes  we  may 
express  the  relation  of  value  in  different  ways ;  we 
generally   choose  money,  but  not  always ;    e.g.    in    the 


VALUE  AND  MARKETS  215 

theory  of  rent  it  is  often  useful  to  take  corn  as  the  meas- 
ure, and  sometimes  in  practice  grain  rents  have  been 
preferred  to  money  rents. 

4.  Relative  Prices  must  be  adjusted  to  Relative  Values.  — 
It  has  already  been  implied  that  the  general  level  of  prices 
may  change,  and  the  causes  of  such  movements  will  be 
examined  in  the  theory  of  money.  At  this  stage,  however, 
the  proposition  may  be  laid  down,  that  whatever  changes 
take  place  in  the  geiieral  level,  relative  prices  must  he  ad- 
justed to  relative  values.  A  change  in  the  level  of  general 
prices  is  the  same  thing  as  a  change  in  the  measure  of 
values,  and  the  mere  change  in  the  measure  cannot  in  itself 
affect  the  relative  value  of  the  things.  The  relative 
values  depend  on  real  causes,  e.g.  the  quantity  of  labour 
and  capital  required  to  produce  them,  etc.  ;  and  these 
causes  are  not  affected  by  the  mode  of  measurement. 

At  the  same  time  it  may  be  indicated  that  during  the 
period  of  transition  from  one  level  to  another  there  is 
often  a  temporary  disturbance  of  relative  prices,  and  thus 
of  values.  It  may  happen  also  that  a  change  in  general 
prices  may  itself  be  due  to  a  disturbance  of  relative  values, 
though  the  explanation  involves  one  of  the  most  difficult 
points  in  monetary  theory.  At  present  all  that  is  intended 
is  to  make  clear  the  meanings  of,  and  the  connections 
between,  values  and  prices. 

5.  A  General  Rise  of  Values  is  Impossible.  —  If  the  term 
general  is  taken  in  the  strict  sense  as  applicable  to  all  the 
things  that  are  the  subject  of  exchange,  it  is  a  truism  that 
if  some  fall  in  value  the  remainder  must  rise  in  value 
relatively  to  the  first  set.  If  any  one  thing  obtains  more 
of  all  the  rest,  the  value  of  all  the  things  except  that  one 


216  ELEMENTS   OF   POLITICAL   ECONOMY 

falls  compared  with  that  one  ;  but  the  exclusion  of  that 
one  makes  the  fall  not  general  in  the  strict  sense.  If  the 
one  thing  that  rises  in  value  is  gold,  that  means  a  fall  in 
general  prices  :  gold  obtains  more  of  all  other  things,  and 
they  obtain  less  gold.  Thus  a  general  fall  (or  rise)  in 
prices  is  quite  possible,  and  such  movements  are  constantly- 
taking  place,  as  is  indicated  by  the  changes  in  the  index 
numbers  of  the  Economist  or  Mr.  Sauerbeck  (^Statistical 
Journal). 

6.  Other  General  Propositions  on  Value.  —  Other  general 
propositions  on  value,  of  wide-reaching  import,  and  closely 
connected,  are  that :  commodities  pay  for  commodities ; 
that  demand  and  supply  are  reciprocal ;  that  all  exchange 
is  ultimately  barter ;  and  that  money  is  the  medium  of 
exchange.  An  increase  in  the  supply  of  commodities 
means  indeed  that  those  who  make  these  things  desire  to 
obtain  money;  but  then  they  usually  desire  to  spend 
this  money  when  obtained,  either  in  consumable  things  or 
in  so-called  intermediate  goods,  and  thus  exchange  becomes 
barter  and  the  extension  of  supply  involves  an  extension  of 
demand.  In  foreign  trade  the  form  assumed  by  these  prop- 
ositions is  that  imports  are  paid  for  by  exports,  and  that  the 
balance  of  trade  is  adjusted  by  reciprocal  demand. 

It  is  no  doubt  true  that  there  may  be  a  disorganisation 
of  the  means  of  exchange,  as  in  monetary  and  credit  crises, 
and  thus,  relatively  to  the  means  of  distribution  by  the 
agencies  of  trade,  there  may  seem  to  be  a  general  excess  of 
supply  or  a  deficiency  of  demand.  In  this  sense  overpro- 
duction may  be  very  real ;  but  not  in  the  sense  that  more 
things  of  all  kinds  are  produced  than  people  in  general 
desire  to  consume  or  are  able  to  purchase.     The  disoi'gan- 


VALUE   AND   MARKETS  217 

isation  of  markets  through  overproduction  of  some  things 
or  through  the  scarcity  of  money  (or  its  credit  representa- 
tives that  will  be  accepted)  is  of  frequent  occurrence  in 
modern  times  ;  but  such  disorganisation  does  not  contro- 
vert the  truth  of  these  general  propositions,  but  rather 
serves  to  illustrate  the  truth  by  contrast. 

7.  Markets.  —  The  simplest  case  of  barter  consists  of 
the  exchange  of  two  commodities  by  two  individuals ;  and 
in  order  to  illustrate  the  advantages  of  exchange  in  the 
gain  of  utility,  this  case  may  be  useful.  But  in  general, 
exchange  implies  that  there  are  a  number  of  buyers  and  a 
number  of  sellers,  and  that  the  things  are  not  directly  bar- 
tered, but  in  the  first  place  the  sellers  sell  for  money  and 
the  buyers  buy  ivith  money.  The  organisation  by  which 
exchanges  of  this  kind  are  effected  is  called  a  market. 

The  history  of  the  development  of  markets  is  one  of  the 
most  important  parts  of  the  history  of  economic  progress. 
At  first  there  were  definite  limits  of  time  and  place,  as  in 
the  market  days  of  market  towns,  and  in  the  great  fairs 
that  still  survive.  From  the  earliest  times  markets  came 
to  be  held  under  conditions  that  insured  publicity  in  the 
transactions,  freedom  of  trade,  and  competition  ;  in  mediae- 
val times  regulations  were  in  force  to  prevent  sales  being 
effected  on  the  way  to  market,  and  special  privileges  were 
granted  to  traders  at  fairs  and  markets.  A  typical,  highly 
organised  market  of  modern  times  shows  these  characters 
more  fully  developed.  The  limits  of  space  and  time  have 
been  extended  in  the  sense  that  the  conditions  of  demand 
and  supply  all  the  world  over,  as  also  the  prospective  con- 
ditions, affect  the  dealings  of  any  particular  market ;  for 
the  great  staples  of  international  trade  the  market-place  is 


218  ELEMENTS  OF  POLITICAL  ECONOMY 

the  whole  world ;  and,  similarly,  there  is  a  continuous  flow 
of  goods,  instead  of  varying  supplies  at  intervals.  Pub- 
licity has  attained  such  a  point  that  dealings  in  distant 
places  are  recorded  at  once  by  telegraph;  and  the  re- 
straints formerly  imposed  on  speculation  have  practically 
disappeared,  though  occasionally  attempts  are  made  to 
bring  them  back  (Germany)  ;  and  dealings  in  "  futures  " 
are  the  chief  characteristic  of  some  modern  markets.  In 
spite,  however,  of  the  extension  and  development  of  mar- 
kets, both  time  and  space  still  impose  their  limitations. 
The  demand  alike  for  consumable  commodities  and  for 
the  raw  materials  and  the  appliances  of  manufacture  is  a 
demand  for  immediate  use,  and  must  be  met  at  the  time 
and  place  considered;  and  the  prospective  supply  and 
demand  only  affect  the  present  supply  and  demand 
indirectly. 

At  any  rate,  for  the  purposes  of  theory  it  is  still  best  to 
assume  that  the  market  is  held  or  made  within  certain 
fixed  limits  of  time  and  space,  and  that  market  prices  are 
the  results  of  actual  bargains  at  particular  times  and 
places,  as  contrasted  with  normal  prices,  which  are  the 
ideals  that  are  the  results  or  goals  of  tendencies. 

Every  one  knows  that  market  prices  are  determined  by 
demand  and  supply ;  but  these  terms  are  by  no  means  so 
clear  as  they  are  familiar.  In  the  analysis  that  is  requi- 
site two  cases  must  be  distinguished :  there  may  be  per- 
fect competition  on  both  sides,  or  there  may  be  various 
degrees  of  monopoly. 

To  begin  with,  we  may  follow  the  usual  practice,  and 
suppose  that  there  is  perfect  competition,  which  implies 
that  all  the  buyers  and  sellers  in  the  market  are  equally 


VALUE   AND   MARKETS  219 

well  informed  as  to  the  conditions  affecting  demand  and 
supply. 

It  is  found  best  for  clearness  to  take  separately  the  laws 
of  demand  and  supply,  and  then  to  explain  what  is  called 
the  equation  or  equilibrium  which  determines  the  market 
price.  In  order  that  a  thing  may  possess  exchange  value 
it  must  have  utility,  and  there  must  be  some  difficulty  in 
the  attainment.     Neither  condition  alone  is  sufficient. 

Utility  is  of  most  importance  in  demand ;  difficulty  of 
attainment  in  supply:  but,  as  will  appear  in  the  analysis, 
demand  and  supply  are  correlative.  Demand  implies  power 
to  purchase,  and  supply  implies  desire  to  exchange ;  and 
thus  demand  involves  an  estimate  of  the  difficulty  of  get- 
ting money,  and  supply  an  estimate  of  the  utility  of 
getting  it.i 

i  This  chapter  is  based  on  Book  III,  Chaps.  I,  II,  III,  and  X,  of  the 
Principles  (Vol.  II),  and  is  much  abbreviated.  Value  is  treated  in  all 
the  text-books,  and  it  seems  unnecessary  to  give  special  references  to  the 
general  theory.  The  peculiar  doctrines  of  the  Austrian  school  are  well 
summarised  in  Smart's  Introduction  to  the  Tlieory  of  Value;  the  Meas- 
urement of  General  Exchange  Value  is  the  title  of  an  able  and  elaborate 
monograph  by  Correa  Moylan  Walsh ;  for  index  numbers,  see  Bowley, 
Elements  of  Statistics  ;  a  brief  account  of  the  simplest  method  is  given  in 
Money  and  Monetary  Problems  (pp.  132-134). 


CHAPTER   II 

OF  DEMAND   AND   SUPPLY 

1.  The  Law  of  Demand.  —  By  demand  is  meant  the  quan- 
tity demanded  at  a  certain  price,  it  being  assumed  that 
the  buyer  can  and  will  pay  the  price  or  that  the  demand 
is  effectual. 

It  is  clear  that  demand  must  mean  more  than  desire 
to  possess,  because  every  one  desires  everything ;  and  the 
less  the  means  of  payment  or  the  chance  of  acquisition, 
so  much  greater  may  be  the  desire.  The  qualification 
"at  a  certain  price"  is  essential,  because,  as  a  rule,  for 
every  price  there  is  a  different  quantity  demanded. 
This  is  expressed  by  saying  that  the  quantity  demanded 
is  a  function  of  the  price. 

The  general  law  of  demand  states  that  as  the  price 
falls,  other  things  remaining  the  same,  the  quantity  de- 
manded increases  (or  better,  as  Sidgwick  says,  is  ex- 
tended\  and  conversely,  as  the  price  rises  the  quantity 
demanded  decreases  (or  better,  is  contracted'). 

The  law  of  demand,  as  thus  stated,  is  applicable  to 
everything  that  bears  a  price,  or  is  the  subject  of  bar- 
gaining in  terras  of  money.  It  applies,  no  doubt,  to 
manufactures  (the  usual  illustration),  but  it  also  applies 
to  all  the  varied  forms  and  usages  of  land  labour  and 
capital.  If  the  price  of  land  rises,  other  things  being 
the  same,  the  demand  falls  off ;  if  wages  fall,  the  demand 
for  servants  will  so  far  increase  ;  if  the  rate  of  discount 

220 


OF   DEMAND   AND   SUPPLY  221 

rises,  the  demand  for  advances  is  checked ;  and  if  on 
the  stock  exchange  some  security  falls  in  price,  it  will 
so  far  extend  the  demand. 

In  theory  we  may  suppose  that  there  is  a  perfect 
continuity  in  prices  and  in  quantities  (as  illustrated  in 
the  demand  curve).  Above  a  certain  price  there  is  none 
demanded,  or  the  price  is  prohibitive ;  as  the  price  falls, 
more  and  more  will  be  demanded,  but  at  last  no  more 
will  be  taken  even  at  a  nominal  or  zero  price ;  and  after 
this  point  is  reached,  the  demand  will  become  negative,  or 
the  seller  must  pay  something  to  get  rid  of  the  thing. 

The  last  phrase  leads  to  the  remark  that  the  law  of 
demand  may  be  stated  in  a  converse  form,  namely,  that 
in  any  market  under  given  conditions,  to  get  rid  of  a 
larger  supply  prices  must  be  lowered.  So  long  as  the 
conditions  prevailing  in  the  market  are  given,  it  makes 
no  difference  whether  we  begin  with  the  prices  or  the 
quantities,  since  the  law  of  demand  simply  expresses 
the  relations  between  the  two.  In  fact,  if,  instead  of 
curves,  we  use  demand  schedules  (Marshall),  we  set 
down  on  one  side,  or  in  one  column,  prices,  and  in  the 
other  the  corresponding  quantities,  —  and  which  is  on 
the  right  hand  and  which  on  the  left  is  of  no  conse- 
quence. The  first  statement,  however,  seems  preferable, 
because  it  refers  only  to  demand,  whilst  the  second  in 
form  refers  rather  to  supply. 

The  degree  or  the  rapidity  of  the  change  in  the 
quantity  demanded  in  response  to  changes  in  price, 
varies  in  different  cases.  If  for  a  small  rise  or  fall  in 
price  there  is  a  great  change  in  the  quantity  demanded, 
the    demand  is  said  to  be   elastic ;  and  conversely,  if   a 


222  ELEMENTS   OF   POLITICAL   ECONOMY 

considerable  change  in  price  has  little  effect  on  the 
quantity  demanded,  the  demand  is  non-elastic  (Marshall). 
Variations  in  elasticity  are  shown  in  the  shapes  of  the 
demand  curves,  but  the  idea  may  be  made  clear  by  con- 
crete examples.  A  tax  on  bread,  which  in  this  illustra- 
tion may  be  supposed  to  raise  the  price,  will  check  the 
demand  to  a  small  extent  only,  even  if  the  tax  is  heavy, 

—  that  is,  the  demand  is  non-elastic  ;  on  the  other  hand 
it  is  said  that  any  addition  to  the  tobacco  tax  would  so 
check   the  demand  that  it  would  yield  no  more  revenue 

—  the  demand  is  elastic.  The  elasticity  of  demand  is  of 
great  importance  in  connection  with  the  elasticity  of 
revenue.  With  regard  to  the  effect  of  small  variations 
in  price,  as  represented  in  the  continuity  of  curves,  the 
supposition  is  not  so  unreal  as  might  appear  at  first 
sight.  In  estimating  the  total  demand  in  any  market 
we  must  add  together  the  demands  of  all  the  different 
persons  for  all  sorts  of  purposes.  Thus  in  the  case  of 
sugar,  there  is  not  only  the  demand  for  direct  consump- 
tion, but  the  demand  also  for  cakes,  jam,  and  beer. 
Similarly,  as  regards  the  factors  of  production  of  various 
kinds  we  must  take  the  aggregate  demands  including 
indirect,  derived,  and  joint  demands.  These  terms  may 
be  explained  by  an  example.  The  demand  for  new 
houses  for  occupation  is  a  direct  demand :  there  is  a  joint 
demand  for  the  various  forms  of  labour  and  raw  material, 
etc.,  used  in  the  building  trade ;  and  for  any  one  of  these 
factors  —  e.g.  the  labour  of  house-painters  —  there  is  a 
derived  demand  (Marshall) 

2.    Changes  in  Demand  —  Rise  and  Fall  in  Demand. — 
Any  change  in  the  conditions  affecting  the   demand  for 


OF  DEMAND  AND  SUPPLY  223 

a  thing  will  cause  a  change  in  the  nature  of  the  demand 
(illustrated  by  a  change  in  the  curve).  Thus,  if  there 
is  a  rise  in  the  relative  utility  assigned  to  a  thing,  a 
higher  price  will  be  given  for  a  certain  quantity.  This 
rise  in  demand  may  be  expected  to  operate  at  every  range 
of  prices,  although  it  is  unlikely  that  the  rise  will  be 
exactly  uniform  throughout.  (In  the  language  of  curves 
the  new  curve  will  be  above  the  old  curve,  but  not 
raised   to  the    same   extent  exactly   throughout.) 

By  a  fall  in  demand  is  meant,  that  at  given  prices 
people  will  take  less;  or  lower  prices  will  be  offered 
for  the  same  quantities.  (The  new  demand  curve  would 
fall  below  the  old  curve.) 

Changes  in  the  law  of  demand  for  a  thing  may  arise 
from  various  causes.  Such  are  the  extension  or  contrac- 
tion in  the  use  of  substitutes ;  an  increase  or  decrease  in 
the  wealth  or  means  of  people ;  changes  in  the  utility 
assigned  to  the  thing  or,  it  may  be,  in  the  estimates  of 
present  and  future  uses. 

With  regard  to  the  influence  of  changes  in  utility  it  is 
the  marginal  utility  that  must  be  considered.  As  already 
explained,  the  utility  of  the  first  portions  of  necessaries 
may  be  considered  practically  infinite  ;  but  after  a  certain 
point  is  reached  more  utility  may  be  obtained  by  expend- 
ing the  next  sum  of  money  on  some  luxury.  The  total 
utility  of  the  luxury  is  less,  but  at  the  point  reached  the 
degree  of  utility  is  greater. 

In  the  same  way  the  total  utility  of  present  consump- 
tion may  be  greater  than  that  expected  from  the  creation 
of  some  form  of  capital,  but  after  a  point  it  may  be  more 
acceptable  to  save  than  to  spend. 


224  ELEMENTS  OF  POLITICAL  ECONOMY 

The  value  of  the  distinction  between  total  and  marginal 
utility  extends  far  beyond  the  possibility  of  exact  measure- 
ment. 

3.  The  Law  of  Supply.  —  The  law  of  supply  may  be 
stated,  mutatis  mutandis,  as  the  exact  analogue  of  the 
law  of  demand.  Supply  means  the  quantity  offered  for 
sale  at  a  price.  The  quantity  offered,  other  things  remain- 
ing the  same,  will  vary  with  the  price.  The  supply,  like 
the  demand,  is  a  function  of  the  price.  The  general  law 
of  supply  is  that :  As  the  price  rises,  other  things  remain- 
ing the  same,  the  quantity  offered  at  that  price  Avill  in- 
crease, and  as  the  price  falls  the  quantity  offered  at  that 
price  will  diminish.  The  law  is  thus  exactly  symmetri- 
cal with  the  law  of  demand.  Similarly  also,  it  is  applied 
to  anything  that  bears  a  price  or  is  saleable.  Other  things 
being  the  same,  with  higher  wages  more  labour  will  be 
offered,  with  higher  interest  more  loanable  capital,  and 
generally  with  higher  prices  more  land,  more  works  of 
art,  more  stock  exchange  securities,  and  in  short,  more 
of  everything  vendible  will  be  thrown  on  the  market. 
And  conversely  of  falling  prices ;  some  of  the  former 
sellers  will  draw  back  and  withhold  their  supply.  These 
examples  show  that  the  law  of  supply  extends  far  beyond 
the  range  of  manufactured  articles.  If  a  saleable  thing  is  of 
such  a  kind  that  if  time  is  allowed  it  can  be  increased,  then 
no  doubt  the  conditions  of  production  and  the  period  re- 
quired for  adding  to  the  effective  supply  will  indirectly 
affect  the  price  at  which  supply  will  be  forthcoming.  But 
it  is  best  logically  to  take  this  case  separately.  (See 
next  chapter.) 

It  is  easy  to  show  that  we  may  also   apply  the  same 


OF  DEMAND  AND  SUPPLY  225 

ideas  of  elasticity,  rise  and  fall,  etc.,  to  supply  as  were 
applied  in  the  case  of  demand.  Thus  with  some  things 
a  slight  rise  in  price  will  bring  out  large  stocks,  in  other 
things  it  will  have  little  effect;  and  the  supply  may  be 
said  to  be  elastic  and  non-elastic  respectively.  Again,  if 
through  the  whole  range  of  the  schedule  of  prices  for  a 
thing  more  is  offered  than  before,  that  constitutes  a  rise 
in  supply  (and  conversely  of  a  fall  in  supply^,  if  we  use 
the  terminology  already  adopted  in  the  case  of  demand. 
People  may  be  more  willing  to  sell  than  before,  owing  to 
temporary  pressure  for  money,  as  in  a  crisis,  or  there  may 
be  the  possibility  of  substitutes  from  other  sources  not 
formerly  available. 

4.  The  Equation  between  Demand  and  Supply  —  The 
Temporary  Equilibrium  Price.  —  We  may  now  combine  the 
two  laws  of  demand  and  supply  so  as  to  show  the  way  in 
which  demand  and  supply  determine  market  price.  As 
before,  this  general  statement  of  the  operation  of  demand 
and  supply  will  apply  to  anything  for  which  there  is  a 
market  (that  is  to  say,  under  the  conditions  of  competi- 
tion—  the  case  of  monopoly  being  deferred). 

In  any  market  at  any  time  (or  in  a  unit  of  time)  the 
price  will  be  so  adjusted,  through  the  competition  of 
buyers  and  sellers,  that  the  quantity  demanded  will  be 
equal  to  the  quantity  offered  at  that  price.  This  is  the 
equation  price  (Mill),  or  temporary  equilibrium  price 
(Marshall). 

It  is  necessary  to  bring  out  in  some  way,  by  reference 
to  competition  or  to  the  higgling  of  the  market,  the 
fact  of  the  process  of  adjustment.  Otherwise  we  are 
landed   in   the   barren  verbalism  that  in  any  market  the 

Q 


226  ELEMENTS  OF  POLITICAL  ECONOMY 

quantity  bought  is  always  equal  to  the  quantity  sold 
(Cuirnes). 

It  may  be  advisable  to  make  explicit  other  conditions 
that  are  generally  taken  for  granted  in  the  determination 
of  market  prices.  Mill,  for  example,  writes  of  markets : 
"  in  which  the  axiom  prevails  that  for  the  same  article  of 
the  same  quality  there  cannot  be  two  prices."  This 
assumption  is  only  true  in  so  far  as  the  conditions  requisite 
to  perfect  competition  prevail,  e.g.  equality  of  knowledge 
on  the  part  of  all  the  buyers  and  sellers  concerned. 

The  possible  buyers  are  not  supposed  to  go  into  the 
market  absolutely  determined  to  buy  so  much  —  coiite  qui 
coute  —  whatever  the  price ;  but  their  demand  will  be 
adjusted  according  to  the  state  of  prices ;  and  similarly  of 
the  supply  and  the  sellers.  Thus  there  will  be  all  degrees 
(within  limits)  in  the  intensity  of  the  desire  to  buy  and  to 
sell  respectively.  An  eager  buyer,  to  be  safe,  may  open 
the  market  by  offering  more  than  would  have  been  neces- 
sary if  he  had  waited  foi-  the  effects  of  competition,  and 
conversely  an  eager  seller  may  accept  less  than  he  might 
have  obtained  if  he  had  waited.  The  higgling  of  the 
market  consists  in  finding  out  by  tentative  offers  what  are 
the  real  conditions  affecting  the  demand  and  the  supply 
on  the  whole,  and  what  price  will  leave  the  least  unsatis- 
fied demand  or  supply  (in  the  limit  make  them  just 
equal).  Thus  on  the  stock  exchange  the  prices  of  specu- 
lative stocks  in  periods  of  excitement  will  vary  from 
moment  to  moment ;  in  fact  every  sale  so  far  alters  the 
conditions  of  the  market,  to  say  nothing  of  the  interven- 
tion of  external  causes  in  the  shape  of  rumours.  And 
even  in  non-speculative  securities  there  are  movements  in 


I 


OF   DEMAND   AND   SUPPLY  227 

the  prices,  although  we  may  calculate  the  price  of  the  day 
on  the  average. 

In  times  of  panic  and  disorganisation  there  are  widely 
different  prices  at  the  same  time  in  the  same  market. 
Similarly,  if  we  take  the  case  of  undeveloped  markets,  such 
as  the  bazaars  of  the  East,  there  is  a  set  of  independent 
bargains  at  different  prices. 

5.  The  Immediate  Effects  of  Changes  in  Demand  and 
Supply.  —  So  far  we  have  supposed  that  both  demand  and 
supply  are  functions  of  the  price,  and  that,  given  the  con- 
ditions or  the  schedules  or  curves,  we  can  determine  the 
price  at  which  sales  will  take  place  under  the  influence  of 
competition. 

We  must  now  consider  the  immediate  effects  of  changes 
in  demand  or  supply  or  both  (of  the  nature  already  de- 
scribed) upon  the  price. 

This  consideration  leads  to  a  second  form  of  the  law  of  de- 
mand and  supply.  If  the  demand  rises,  supply  remaining 
the  same,  the  price  rises ;  and  conversely,  if  demand  falls, 
the  price  falls.  Similarly,  we  may  suppose  that  the  change 
begins  with  the  supply,  the  demand  remaining  the  same ; 
or  there  may  be  changes,  in  the  same  or  in  different 
directions,  in  both  demand  and  supply. 

The  various  possible  cases  and  the  effects  on  price  are 
best  illustrated  by  means  of  curves :  but  they  are  all  de- 
ducible  from  the  real  meaning  of  these  changes. 

A  rise  in  demand  means  that  people  will  take  more  at 
the  old  price ;  and  accordingly  if  the  old  price  were  to  re- 
main undisturbed,  there  would  be  unsatisfied  demand,  and 
then  the  competition  of  buyers  raises  the  price.  Similarly, 
a  rise  in  supply  means  that  people  will  sell  more  at  the 


228  ELEMENTS   OF   POLITICAL   ECONOMY 

old  price,  and  therefore  if  that  price  remained,  there  would 
be  unsatisfied  supply ;  and  by  the  competition  of  sellers  the 
price  would  fall. 

6.  Ulterior  Effects  of  Changes  in  Demand  and  Supply.  — 
We  may  now  consider  the  ulterior  effects.  Take  first  the 
case  of  a  rise  in  price  due  to  a  rise  in  demand.  If  the  sup- 
ply cannot  be  increased,  then  the  rise  of  price  is  permanent, 
as  in  the  case  of  building  land  in  growing  cities. 

If  the  supply  can  be  increased,  the  ultimate  effect  de- 
pends on  the  conditions  of  production.  If  the  conditions 
are  such  that  the  law  of  diminishing  return  comes  into 
play,  then  also  the  rise  of  price  is  permanent  so  long  as  the 
conditions  remain  the  same.  If,  on  the  other  hand,  the  in- 
creased supply  brings  into  play  the  economies  of  large 
production  (or  the  law  of  increasing  return),  though  the 
price  rises  in  the  first  instance,  it  will  ultimately  fall  to  a 
lower  level.  The  reason  simply  is  that  if  the  old  price 
were  maintained  there  would  be  exceptional  profit. 

If  in  the  conflict  of  opposing  forces  there  is  a  balance  of 
increasing  and  diminishing  return,  the  price  after  the  tem- 
porary rise  will  return  to  the  former  level.  This  is  the 
case  of  constant  return. 

Similar  reasoning  may  be  applied  in  the  case  of  a  fall  in 
price  due  to  a  fall  in  demand.  One  example  may  suffice. 
Suppose  that  the  commodity  is  produced  according  to  in- 
creasing return.  Then  as  the  production  is  contracted  the 
cost  rises.  Thus  in  the  end  the  price  may  rise  to  a  higher 
level  than  before.  This  process  may  go  on,  the  rise  in 
price  checking  the  demand,  and  thus  again  contracting 
the  supply,  until  the  commodity  ceases  to  be  produced. 
In  this,  as  in  the  other  cases  taken,  there  are  various  coun- 


OF   DEMAND   AND   SUPPLY 


229 


teracting  causes.  Thus  the  so-called  law  of  increasing 
return  does  not  act  in  such  a  way  that  all  the  economies 
are  lost  if  the  production  is  contracted.  It  may  happen 
simply  that  the  weaker  producers  are  driven  from  the 
market.^ 

At  the  price  OP,  none  is  de- 
manded ;  at  zero  price  Q,  no 
more  than  OQ  will  be  taken 
(satiety)  ;  between  these  limits 
with  every  fall  in  price  the 
quantity  demanded  increases. 
To  induce  people  to  take  more 
than  0Q,2i  bounty  must  be  given 
or  the  price  becomes  negative. 

If  the  curve  is  steep,  it  is 
non-elastic,  if  flat,  elastic.  In 
the  limit  if  the  curve  becomes 
parallel  to  OF,  that  means  per- 
fect non-elasticity,  —  whatever  the  price,  the  same  quantity  is  demanded  ; 
if  the  curve  becomes  parallel  to  OX,  there  is  perfect  elasticity,  —  the 
smallest  change  in  price  extends  or  contracts  the  demand  indefinitely. 


At  price  OS,  none  is  offered ;  as  price 
rises,  more  is  offered  ;  if  after  S\,  the  curve 
becomes  parallel  to  OY,  whatever  the 
change  in  price  no  more  is  offered,  — 
scarcity  prices. 


1  See  Principles,  Vol.  II,  Book  III,  Chaps.  IV  and  VI.  The  law  of  de- 
mand is  treated  by  Marshall  in  Principles,  Book  III,  and  the  equilibrium 
of  demand  and  supply  in  Book  V.  Book  IV  treats  of  the  agents  of  pro- 
duction. Tlie  treatment  differs  from  that  here  adopted  in  that  the  sym- 
metry of  demand  and  supply  is  not  insisted  on. 


230 


ELEMENTS   OF   POLITICAL   ECOXOMY 


Fig.   I 


Fig,  2 


D    Di 


MgMMj, 
Fig.  3 


S    Si 


DgD 


MjM  Ml 
Fig.  4 


Sz  S 


MoM 

Changes  in  Demand  and  Supply  and  their  Immediate 
Effects  on  Price. 

I.  Demand  only  changing  :  (a)  VAsing  — effect  P,  .^r,'>  P .V  .p.     i. 

(/.)  Falling-    "     P,  .V2< /'.)/■  (*'^- ^>- 

11.   Supply  only  changing  :     (a)  IJising  — effect  P,  .1/,  </' .)/"   ,,;,.     „, 

(MFalhng-     "     P^Jf,>  PJf  ^^'S-  ^>- 

III.  Both  Demand  and  Supply  changing,  and  in  the  mine  direction  : 

((/)  Rising  (Fig.  3) ;  (//)  Falling  (F"ig.  4).     Whether  now  price  will  be  greater  or  less 
than  the  old  [irice  is  indeterminate. 

IV.  Both  Demand  and  Supply  changing,  but  in  oppnuite  directions  : 

(a)  Demand  rising  and  Sujiplv  falling  —  effect  /'j  J/3> /"  J/(Fig.  5) ;  (6)  Demand 
falling  and  Supply  ri.sing --  ctlVct  /'j  -V,  <  P  M  (Fig.  6). 
In  all  these  cases  the  rise  or  fall  is  supposed  to  be  uniform  throughout. 


CHAPTER   III 

NOKMAL  VALUE   AND   COST   OF  PRODUCTION 

1.  Meaning  of  Normal  Value.  —  Market  prices  are  the 
actual  prices  recorded  in  actual  market  quotations,  and  in 
theory  they  are  the  prices  determined  under  the  conditions 
of  demand  and  supply  that  represent  the  essential  condi- 
tions of  these  markets.  These  market  prices  are  subject  to 
incessant  fluctuations,  but  [in  certain  cases]  there  is  a 
central  or  natural  price  to  which  the  prices  of  [some]  com- 
modities are  continually  gravitating  (Adam  Smith).  The 
conception  of  natural  or  normal  price  is  generally  associ- 
ated with  commodities  that  are  manufactured  or  produced 
in  the  narrow  sense  of  the  term,  and  in  general  also  it  is 
said  that  the  natural  or  normal  price  depends  on  cost  of 
production.  It  is  often  further  supposed,  as  by  Mill, 
that  on  an  average  of  years  sufficient  to  enable  the  oscilla- 
tions on  one  side  of  the  central  line  to  be  compensated  by 
those  on  the  other,  the  market  value  agrees  with  the 
natural  value ;  that  is  to  say,  that  in  the  "  long  run  " 
natural  cost  of  production  and  average  come  to  the  same 
thing.  Later  analysis,  however,  has  shown  that  the  term 
normal,  which  has  displaced  the  question-begging  term 
natural  must  be  carefully  distinguished  both  from  cost 
of  production  and  from  average  values.  The  word  norma 
is  literally  the  square  used  by  carpenters  to  get  their  work 
in  proper  proportion  :  it  gives  the  ideal  to  which  their 

231 


232  ELEMENTS  OF  POLITICAL   ECONOMY 

efforts  are  directed.  By  analogy  the  term  has  been 
extended  to  mean  the  law  or  pattern  to  which  any  varia- 
tions tend  to  conform  or  be  restored.  Normal  may  thus 
be  taken  to  be  the  adjective  that  corresponds  to  economic 
law  (Marshall).  In  this  sense  it  is  obviously  much 
wider  than  cost  of  production.  Thus  we  can  speak  of 
normal  rates  of  wages  and  profits  in  which  the  idea  of  cost 
of  labour  or  capital  is  out  of  place.  Again  we  may  say 
that  normal  monopoly  value  is  that  which  gives  the 
maximum  net  return,  and  in  general  this  is  above  the  value 
that  would  result  from  cost  of  production  under  compe- 
tition. 

This  last  example  also  illustrates  very  clearly  the 
difference  between  normal  and  average,  for  the  actual 
monopoly  profit  can  never  exceed  the  normal  and  is  sure 
sometimes  to  fall  below  it,  unless  the  monopolist  is  supposed 
to  be  omniscient.  In  the  first  seventy  years  of  the  nine- 
teenth century  the  normal  ratio  of  gold  to  silver  was  Ib^  to 
1,  but  it  was  only  remotely  influenced  by  cost  of  production, 
Adam  Smith  himself  observed  in  dealing  with  ordinary  cost, 
the  market  price  is  likely  to  remain  longer  above  than  below 
this  cost;  and  whether  this  opinion  is  accepted  or  not,  it 
shows  that  on  this  view  the  average  price  for  a  long  time 
might  exceed  the  natural  price. 

But  althougli  normal  value  is  wider  than  cost  value  and 
different  from  average,  one  important  form  of  normal  value 
is  that  which  is  determined  by  cost  of  production,  and 
in  general  the  cost  of  production  value  is  closely  connected 
with  the  average.  We  may  now  examine  the  relations  of 
cost  of  production  to  market  values. 

2.    Real  Cost  and  Money  Cost.  —  By  real  cost  in  econom- 


NORMAL   VALUE   AND   COST   OF   PRODUCTION      233 

ics  is  meant  the  sum  of  the  efforts  and  sacrifices  that  are 
necessary  to  produce  a  thing.  So  far  as  this  conception  is 
capable  of  analysis,  it  has  been  dealt  with  in  the  examination 
of  the  meaning  of  production  and  again  of  real  wages. 

In  some  of  the  problems  of  value  it  may  be  necessary 
again  to  go  back  to  this  ultimate  cost  (as  in  considering 
the  real  advantages  of  foreign  trade  and  distribution  of 
the  advantages  between  the  countries  concerned).  In 
general,  however,  in  this  department  we  do  not  go  beyond 
the  money  wages  and  profits  that  are  necessary  to  call  forth 
these  efforts  on  the  part  of  labour  and  capital. 

From  this  point  of  view  the  ultimate  elements  of  cost  of 
production  are  the  money  wages  and  profits  of  all  the 
various  persons  concerned  in  the  production ;  that  is,  we 
consider  the  money  values  required  to  compensate  the 
disutilities  of  real  cost. 

Strictly  speaking  again,  in  modern  industrial  societies, 
this  would  involve  an  endless  series  of  prices.  There  is 
the  cost  of  buildings,  of  transport,  etc.,  and  even  the  cost 
of  the  government  to  be  taken  account  of ;  and  at  first 
sight  this  endless  series  of  money  costs  would  seem  to  be 
as  unworkable  as  the  corresponding  disutilities  of  real  cost. 

But  we  can  adopt  the  common  device  of  neglecting 
forces  below  a  certain  magnitude,  and  we  may  confine  the 
attention  to  the  more  general  causes  ;  and  we  must  try  to 
discover  general  formulae  that  are  applicable  to  many 
particular  cases. 

It  must  never  be  forgotten  that  value  is  a  relative  term ; 
the  problems  of  value  are  problems  of  ratios,  and  in  normal 
values  we  are  dealing  with  normal  ratios. 

It  follows,  then,  that  in  dealing  with  cost  as  the  deter- 


234  ELEMENTS   OF  POLITICAL  ECONOMY 

minant  of  values  we  cannot  simply  take  the  money  cost  of 
one  thing  by  itself :  we  have  to  deal  with  the  relations  of 
the  cost  of  different  things. 

As  in  most  parts  of  the  theory  of  value  it  is  necessary  to 
adopt  the  abstract  or  deductive  method.  The  most  ardent 
advocate  of  the  realistic  treatment  of  economics  could 
make  nothing  of  the  records  of  millions  of  particular  prices 
unless  he  had  some  guiding  ideas  for  their  classification. 
Even  the  calculation  of  averages  will  not  itself  reveal 
causes,  and  some  idea  of  causes  must  be  formed  before  the 
subjects  of  statistical  investigation  can  be  selected.  A 
glance  over  the  volumes  of  Thorold  Rogers  or  the  later 
prices  of  Tooke  and  Newmarch  will  at  once  show  how 
hopeless  it  is  to  appeal  directly  to  what  are  supposed  to  be 
facts. 

According  to  the  deductive  or  abstract  method,  we 
begin  with  the  operation  of  certain  forces  under  hypotheti- 
cal conditions.  It  must  be  premised,  however,  that  al- 
though the  conditions  are  hypothetical,  the  causes  are  real 
and  always  of  fundamental  importance. 

3.  The  Analysis  of  Cost  of  Production.  —  Suppose  first 
that  all  the  things  considered  are  produced  by  labour  of 
the  same  kind  and  efficiency,  and  that  the  contribution  of 
capital  is  so  small  that  it  may  be  neglected.  Under  these 
conditions,  as  was  pointed  out  by  Ricardo,  the  values  of 
the  things  would  vary  simply  and  directly  with  the 
amount  or  quantity  of  labour  that  they  required.  If  all 
the  labour  is  uniform  and  paid  at  the  same  rate,  the  gen- 
eral rate  of  wages  makes  no  difference.  It  is  usual  to  illus- 
trate by  reference  to  "  economic  savages,"  but  it  is  easy 
to  give  examples  in  modern  societies  in  which  the  chief 


NORMAL  VALUE  AND  COST  OF  PRODUCTION     235 

determinant  in  relative  values  is  the  quantity  of  unskilled 
labour  required  to  make  the  things,  e.g.  in  the  relative 
costs  of  parts  of  canals,  railways,  etc. 

Again,  if  we  regard  capital  itself  as  the  product  of 
labour,  the  relative  values  of  the  buildings,  machines,  etc., 
required  to  assist  labour,  will  depend  partly,  at  any  rate, 
on  the  amount  of  labour  involved  in  their  construction, 
though  in  this  case  it  is  complicated  by  the  variations  in 
the  kinds  of  labour  and  degree  of  skill. 

In  order  to  take  adequate  account  of  differences  in  the 
hinds  of  labour,  it  is  necessary  to  bring  in  the  money 
measures  or  the  differential  7-ates  of  wages.  We  refer  back 
to  the  causes  of  differences  of  wages  in  different  employ- 
ments. We  may  take  it  that  under  given  industrial 
conditions  there  are  certain  normal  ratios  of  wages  for 
different  kinds  of  w^ork.  These  are  the  normal  ratios 
about  which  the  market  rates  of  wages  oscillate. 

In  estimating  now  the  relative  values  of  commodities 
produced  by  labour  (the  influence  of  capital  being  still 
negligible),  we  compare  the  labour  bills  reckoned  in 
terms  of  money.  If  all  the  labour  were  uniform,  and 
paid  at  the  same  rates  under  the  supposition  that  only 
the  cost  of  the  labour  need  be  considered,  a  rise  or  fall  in 
the  rate  of  money  wages  would  have  no  effect  in  disturb- 
ing relative  values.  Any  change  in  relative  rates,  how- 
ever, would  have  an  effect  ;  in  the  respective  labour  bills 
a  change  in  the  rate  of  wages  in  one  case  operates  as 
effectively  as  a  change  in  the  quantity  of  labour. 

The  introduction  of  money  wages  as  a  determinant  of 
cost  and  thus  of  value,  demands  a  word  of  explanation 
in  the  light  of  some  recent   but  one-sided  developments 


23G  ELEMENTS  OF  POLITICAL  ECONOMY 

of  the  theory  of  value.  If  (in  the  absence  of  capital  and 
profits)  the  price  obtained  for  the  product  is  distributed 
in  wages  paid  to  the  producers,  it  may  seem  a  verbal 
truism  to  say  that  the  cost  depends  on  the  wages.  But 
the  point  is  that  we  are  not  dealing  with  the  particular 
cost  of  a  particular  thing,  but  with  the  relative  normal 
values  of  various  things.  There  are  certain  real  causes 
that  determine  relative  wages,  e.g.  a  plumber  gets  more 
than  his  boy,  a  carpenter  gets  more  than  an  agricultural 
labourer,  a  man  gets  more  than  a  woman.  These  dif- 
ferences in  rates  may  be  illustrated  at  any  time  or  over 
relatively  long  periods.  If,  then,  one  thing  requires,  for 
the  most  part,  highly  skilled  and  trustworthy  labourers, 
and  another  requires  only  unskilled  labourers,  without 
characters,  the  value  of  the  former  will  be  so  much  higher. 
The  amount  of  labour  (the  number  of  men,  the  hours  of 
work,  etc.)  is  still  the  dominating  factor,  but  it  is  no 
longer  a  case  of  every  one  counting  for  one,  and  no  one 
for  more  than  one. 

If  the  market  price  of  anything  happens  to  rise,  then 
for  the  time  being  the  labour  required,  if  strong  enough 
in  bargaining  power,  may  obtain  more  than  the  normal 
rate  current  for  that  kind  of  labour,  but  such  a  rise  in 
price  would  not,  in  general,  suffice  to  permanently  raise 
the  relative  wages  of  that  particular  form  of  labour.  And 
if  in  certain  cases  such  were  the  effect,  it  must  be  ascribed 
to  the  conditions  affecting  the  supply  of  that  labour  at 
least  as  much  as  to  the  movement  in  price.  After  this 
explanation,  which  applies  later  on  mutatis  mutandis  to 
relative  profits,  the  results  of  the  further  analysis  may  be 
indicated  very  briefly. 


NORMAL  VALUE   AND  COST  OF  PRODUCTION     237 

Suppose  next  that  all  the  things  are  made  directly  by 
capital  without  the  intervention  of  labour  directly.  We 
may  suppose  that  we  have  everlasting  machines  that  only 
require  the  eye  of  the  master  to  keep  going.  The  relative 
values  of  the  things  so  manufactured  will  be  determined, 
in  the  first  place,  by  the  relative  amounts  of  capital  re- 
quired. This  is  exactly  analogous  to  the  quantity  of 
labour  of  the  first  case  ;  and  if  we  bring  in  relative  profits, 
we  have  the  analogy  to  the  second  case.  If  the  machines 
are  indestructible,  the  only  element  in  cost  is  the  profits, 
for  the  machine  remains.  Under  these  conditions  a  rise 
or  fall  in  general  profits  would  not  affect  relative  values ; 
but  any  change  in  relative  profits  would  disturb  the  rela- 
tions just  as  effectively  as  a  change  in  the  quantities  of 
capital  required. 

We  may  now  approach  nearer  to  actual  conditions  and 
suppose  that  things  are  made  partly  by  labour  directly  and 
partly  by  auxiliary  capital.  In  this  case  a  rise  or  fall  in 
general  wages,  compared  with  general  profits,  will  disturb 
relative  values  according  to  the  proportions  in  which  la- 
bour and  capital  enter  into  the  cost  of  the  different  things. 

Further  complications  are  introduced  when  we  take 
account  of  the  different  degrees  of  durability  of  the  fixed 
capital  and  the  amounts  of  labour  required  in  constructing 
the  different  forms.  The  principle  applied  throughout  is 
that  anything  that  affects  values  equally  does  not  disturb 
their  relations,  because  a  general  rise  or  fall  of  values  is 
impossible. 

The  raw  material  of  some  manufactures  is  of  more 
importance  than  the  labour  bill  (as  in  paper  made  from 
esparto  or  rags).     The  value  of  the  raw  material  will  again 


238  ELEMENTS  OF  POLITICAL  ECONOMY 

depend  on  the  relative  conditions  of  production.  There 
may  be  elements  of  monopoly  or  scarcity ;  or  diminishing 
return  may  come  into  play,  in  which  case  the  normal  value 
of  the  material  depends  on  the  marginal  cost. 

These  closer  approximations  to  actual  conditions,  though 
in  one  way  they  complicate  the  general  argument,  in  some 
respects  they  make  it  more  clear.  When  we  take  account 
not  only  of  what  is  called  the  prime  cost,  but  also  of  the 
share  borne  by  a  thing  of  the  supplementary  cost,  it  becomes 
still  more  clear  that  the  normal  prices  of  finished  goods  do 
not  determine  the  rates  of  wages,  but  rather  the  converse. 
Railways  and  steamers  are  essential  to  the  cotton  manufac- 
ture and  to  all  the  other  manufactures  of  the  country.  A 
rise  in  the  price  of  one  of  these  manufactures  might  for 
the  time  raise  the  wages  of  the  labour  directly  concerned, 
but  it  could  hardly  affect  the  wages  of  the  thousands  en- 
gaged in  transport. 

In  conclusion  it  may  be  repeated  that  the  normal  values 
must  be  expressed  in  relation  to  something  besides  money. 
Cost  must  be  separated  into  its  component  factors ;  and  for 
each  of  these  factors  there  is  a  demand  that  is  relatively 
large  compared  to  the  demand  derived  from  the  particular 
product. 

The  principle  that  tends  to  make  the  market  values 
gravitate  to  the  normal  is  in  modern  industry  on  a  large 
scale  the  so-called  tendency  of  profits  to  equality.  The 
expression  is  apt  to  be  misleading,  and  as  explained  in 
the  chapter  on  Profits,  it  is  better  to  speak  of  the  insta- 
bility of  exceptional  rates. 

The  "law  of  substitution".  (Marshall)  expresses  the  con- 
tinuous striving  for  new  economies  in  production ;  these  new 


NORMAL  VALUE  AND  COST  OF  PRODUCTION     239 

economies,  so  long  as  the  old  price  is  maintained,  give 
exceptional  rates  of  remuneration  which  are  a  species  of 
quasi-ieni.  But  quasi-rents,  like  true  economic  rents,  de- 
pend on  prices  and  not  prices  on  quasi-vents.  (See  next 
chapter. ) 

Case  of  Joint  Products.  — If  we  suppose  that  two  or  more 
things  can  only  be  produced  together,  or  that  it  would  be 
just  as  expensive  to  produce  any  one  as  this  one  with  the 
others,  we  have  the  case  of  joint  cost:  e.g.  wool  and  mutton, 
etc.  In  this  case  the  normal  price  of  the  two  together  will 
tend  to  conform  to  the  aggregate  cost  of  production,  and 
the  relative  prices  of  the  joint  products  will  depend  on 
demand  and  supply.  Suppose  that  there  is  a  rise  in  the 
demand  for  wool,  so  far  that  raises  its  price,  but  the  demand 
for  mutton  may  be  supposed  to  remain  undisturbed. 
There  will  be  a  rise  in  the  value  of  the  wool  and  mutton 
combined,  or  there  will  be  exceptional  profits  in  sheep 
farming.  Accordingly  more  sheep  will  be  reared  until  the 
total  yield  gives  an  ordinary  return.  With  the  increase  of 
supply  the  price  of  wool  will  fall  to  some  extent,  but  the 
price  of  the  mutton  will  fall  still  more. 

It  should  be  observed  that  the  producers  of  joint  products 
can  in  general  exercise  some  influence  on  the  relative 
proportion  of  supply  of  the  two  factors,  or  at  any  rate  can 
influence  the  quality.  Thus  with  a  rise  in  wool  sheep 
would  be  bred  with  the  idea  of  improving  the  stock  as 
regards  wool,  and  conversely  of  mutton.  The  general 
principles  applicable  to  the  aggregate  joint  cost  will  vary 
with  the  conditions  of  production,  e.g.  increasing  or  dimin- 
ishing return.  The  case  of  joint  products  is  of  much 
wider  application  than  is  generally  supposed  at  first  sight, 


240  ELEMENTS  OF   POLITICAL   ECONOMY 

e.g.  nearly  every  manufacture  has  some  product  which 
was  formerly  considered  as  waste,  but,  owing  to  improve- 
ments in  production  or  changes  in  demand,  acquires 
value. ^ 

Note  on  Expenses  of  Production. 

In  the  article  on  Value  by  the  present  author  in  the  Encyclo- 
pcedia  Britannica  (9th  ed.),  a  formula  is  given  which  illustrates 
the  complexity  of  the  expenses  of  production  of  ordinary  commodi- 
ties. In  this  formula  account  is  taken  of  the  amount  of  fixed  capital 
required,  the  rate  of  wear  and  tear,  the  rate  of  profit,  the  amount  of 
labour,  the  price  in  wages  of  the  labour,  and  the  time  of  production. 
No  special  reference  is  made  to  raw  material  or  to  the  elements  of 
supplementary  cost  or  to  differences  in  the  rates  of  wages  of  the 
different  employees.  And  yet  even  as  so  simplified  the  formula 
seems  complex.  To  compare  the  relative  expenses  of  two  commodi- 
ties and  thus  their  cost  values,  we  must  take  a  similar  formula  for 
the  second  commodity. 

Let  E^  represent  the  expense  of  production  (as  indicated)  of  com- 
modity A.  Qj  is  the  value  of  the  fixed  capital,  i\  the  rate  of  wear 
and  tear  per  annum,  Pj  is  the  rate  of  profit  on  the  whole  capital,  Q2 
the  number  of  labourers,  w^  the  rate  of  wages,  and  t^  the  time.  Then 
for  commodity  A  we  have 

^- =  N4 +  ;)  +  «'•«■■'(' +^0)]'- 

and  for  commodity  B, 

Changes  are  constantly  taking  place  in  all  the  elements  taken,  and 
others  have  been  omitted.  It  thus  appears  that  under  modern  con- 
ditions normal  values  are  liable  to  frequent  changes,  if  by  normal  we 
mean  cost  value. 

1  Principles,  Book  III,  Chaps.  V  and  VI ;  Mill,  Principles,  Book  III, 
Chaps.  Ill  and  IV ;  Marshall,  Principles,  Book  V. 


CHAPTER  IV 

RENT  AND  VALUE — MONOPOLY  VALUE 

1.  Economic  Rent  as  a  Factor  in  Price.  —  It  has  been 
shown  in  the  pure  theory  of  rent  that  under  the  condi- 
tions laid  down  rent  depends  on  price  and  not  price  on 
rent.  The  marginal  cost  determines  the  price  and  neither 
the  marginal  land  nor  the  marginal  dose  of  capital  pays 
rent. 

Certain  exceptions,  however,  may  be  noticed  to  this 
rule  when  the  conditions  are  changed. 

Suppose  that  land  can  be  used  for  other  purposes  and 
accordingly  the  land  available  for  agriculture  is  diminished, 
e.g.  if  large  quantities  of  land  are  afforested.  Other  things 
being  the  same,  the  marginal  cost  of  the  agricultural  pro- 
duce will  rise.  And  the  reason  of  this  rise  is  that  the 
distribution  of  land  for  different  purposes  is  determined 
by  the  rent  which  it  will  yield. 

Again,  if  we  take  the  case  of  any  new  product  the 
experimenters  must  pay  the  economic  rent  of  the  land 
that  they  require,  and  this  rent  will  be  an  element  in 
the  cost.  This  assumes  of  course  that  for  this  product 
marginal  land  that  pays  no  rent  is  not  available,  or  is  not 
of  good  enough  quality.  Indirectly  also,  as  before,  the 
price  of  the  agricultural  produce  would  be  affected.  The 
principle  applied  is  that  land  is  limited  and  the  better 
qualities  are  still  more  limited.     Accordingly,  once  it  is 

u  241 


242  ELEMENTS   OF   POLITICAL   ECONOMY 

fully  taken  up,  any  appropriation  for  other  purposes  must 
diminish  the  supply  for  agricultural  produce;  this  will 
raise  the  price  and  it  will  be  profitable  to  resort  to  more 
intensive  cultivation.  Thus  the  exaction  of  rent  for 
other  purposes  raises  the  price  of  agricultural  produce. 

In  the  intensive  form  of  the  theory  of  rent  it  is  assumed 
that  the  application  of  capital  stops  at  the  last  dose  that 
yields  ordinary  profits.  If  the  application  were  to  be 
carried  farther  and  the  total  capital  employed  were  still 
to  obtain  ordinary  profits,  the  deficiency  on  the  last  dose 
could  only  be  made  up  out  of  rent.  Thus  there  is  a 
constant  struggle  between  farmers  and  landowners  as 
regards  the  advantage  of  certain  improvements.  If  the 
farmer  is  to  retain  his  profit,  any  loss  that  occurs,  if  the 
capital  expenditure  is  pushed  too  far,  must  fall  on  rent. 
It  is  analogous  to  a  tax  levied  on  rent.  At  the  same  time 
the  increase  of  produce  due  to  the  improvements  will  so 
far  tend  to  lower  the  price,  which  again  will  lower  rent. 
It  is  to  the  economic  interest  of  the  landowner  to  prevent 
this  double  fall  in  rent  by  limiting  the  intensity  of  the 
cultivation.  This  limitation,  however,  so  far  raises  the 
price. 

The  necessity  for  limitation  in  order  to  maintain  rent  is 
still  more  clearly  seen  in  the  case  of  labour  applied  to  small 
holdings.  If  crofters  and  squatters  are  allowed  to  apply  as 
much  labour  as  they  choose  to  land,  the  rent  will  disappear. 
The  increase  of  supply  of  produce,  however,  will  so  far 
tend  to  lower  the  price ;  though  it  is  probable  in  this 
case  that  the  inferior  methods  of  cultivation  adopted  will 
more  than  neutralise  this  influence.  The  case  of  peasant 
properties   is   similar.      If   a  value   were   placed   on   the 


RENT  AND  VALUE  — MONOPOLY  VALUE  243 

labour,  the  economic  rent  in  many  cases  would  be  ab- 
sorbed. Thus  the  displacement  of  peasant  properties 
by  large  estates  that  are  worked  to  pay  a  maximum  rent 
would  tend  to  reduce  the  amount  produced  and  so  far 
raise  its  price.  On  the  other  hand  the  recession  of  the 
margin  would  diminish  the  marginal  cost  so  far  as 
natural  conditions  are  concerned. 

Similar  reasoning  may  be  applied  in  the  case  of  building 
land.  Every  landowner  is  supposed  to  let  the  land  so  as 
to  give  the  highest  rent ;  and  it  may  pay  best  to  keep  the 
land  vacant  for  a  long  time,  rather  than  let  it  at  a  low 
rent  for  buildings  which  it  would  be  expensive  to 
remove  when  the  land  might  be  let  on  better  terms  for 
other  purposes.  So  far  this  holding  up  of  land  gives  the 
remainder  a  scarcity  value,  which  indirectly  raises  the 
cost  of  houses  to  the  occupiers.  Whether  this  reservation 
of  land  is  so  much  against  the  public  interest  as  at  first 
sight  appears  is  another  matter.  (See  Principles,  Book  V, 
Chap.  XI.) 

If  the  owners  of  land  make  a  tacit  or  open  combination 
the  case  reduces  to  monopoly  value.  So  far  as  there  is  no 
combination,  however,  there  is  no  monopoly. 

2.  Qwas/'-rent.  —  Quasi-rQxvt  is  the  term  used  by  Pro- 
fessor Marshall  to  describe  the  "net  incomes  derived 
from  appliances  of  production  already  made  by  man " 
which  in  some  respects  resembles  true  economic  rent. 
"When  we  are  considering  periods  of  time  too  short  to 
enable  the  supply  of  such  appliances  to  respond  to  a 
change  in  the  demand  for  them,  the  stock  of  them  has 
to  be  regarded  as  temporarily  fixed.  For  the  time  they 
hold  nearly  the  same  relations  to  the  price  of  the  things 


244  ELEMENTS   OF   POLITICAL   ECONOMY 

which  they  take  part  in  producing  as  is  held  by  land  or  any 
other  free  gift  of  nature  of  which  the  stock  is  permanently 
fixed,  and  whose  net  income  is  a  true  rent."  The  term 
appliance  of  ptroduction  is  taken  in  a  wide  sense  and  is 
extended  by  analogy  to  business  ability  and  manual  skill. 

Suppose  that  there  is  a  rise  in  demand  for  any  com- 
modity and  therefore  for  the  time  being  a  rise  in  price. 
The  appliances  of  production  cannot  be  immediately 
increased,  and  therefore  those  already  in  existence  will 
earn  exceptional  rates  of  remuneration.  Such  excep- 
tional rates  may  fairly  be  called  quasi-rents.  If  the 
rise  of  price  continues  in  time,  the  appliances  will  be 
increased,  and  quasi-rents  considered  as  exceptional 
profits  or  wages  will  tend  to  disappear.  In  the  same 
way  if  one  firm  makes  an  improvement,  the  differential 
profit  may  be  called  a  quasi-rent,  which  will  tend  to 
disappear  as  the  improvement  is  generally  adopted.  So 
far  the  conception  is  simple.  A  difficulty,  however,  is 
sometimes  felt  when  we  come  to  the  case  of  a  fall  in 
demand  and  in  j)rice.  Under  these  conditions  the  worst 
appliances  will  no  longer  be  woi'ked  or  there  will  be  a 
recession  of  tlie  margin.  Some  of  the  appliances  will 
just  yield  the  actual  expenses  of  working  them,  but  no 
surplus.  But  the  excess  of  the  price  got  by  the  goods 
made  by  the  better  appliances  over  their  wear  and  tear, 
and  the  actual  expenses  of  working  them  will  be  the 
net  income  which  tliese  appliances  yield  during  the 
short  period  of  depression.  In  this  case  the  quasi-rent 
derived  from  the  appliances  (that  is,  the  net  income 
reckoned  in  the  way  described)  will  be  less  than  the 
normal   profit   on   the    original    investment.      (Marshall, 


RENT  AND  VALUE  — MONOPOLY  VALUE    245 

Economics  of  Lidustry,  3rd  edition,  Appendix  D,  and 
Pri7iciples,  Book  V,  Chap.  IX.) 

The  conception  quasi-ient  must  be  taken  with  Professor 
Marshall's  conception  of  normal  value.  Over  a  period 
long  enough  for  the  factors  of  production  to  conform 
to  their  cost  of  production,  the  price  of  the  product 
depends  on  the  costs  of  the  factors,  and  it  is  to  these 
long  periods  that  the  term  7iormal  is  applied.  If  the 
period  taken  is  too  short  for  the  supply  of  the  factors 
to  be  readjusted  to  any  change  in  the  demand,  the  price 
of  the  product  determines  the  income  of  the  factors. 

3.  Monopoly  Value.  —  The  principles  of  monopoly  value 
are  of  special  interest  at  the  present  time  owing  to  the 
extension  of  trusts,  and  the  application  of  combinations 
to  labour  and  capital.  The  general  principles  of  monop- 
oly can  be  explained  without  the  aid  of  mathematics, 
and  in  this  place  only  so  much  will  be  attempted. 

We  may  begin  with  the  simplest  case  of  a  seller's  mo- 
nopoly. Suppose  (with  Cournot)  that  an  individual  pos- 
sesses a  natural  well  that  supplies  some  unique  mineral 
water  which  practically  involves  no  cost  in  the  distri- 
bution. The  owner  must  find  out  the  law  of  demand. 
A  very  high  price  may  be  prohibitive,  and  at  a  very  low 
price  customers  may  be  turned  away,  or  in  any  case  the 
return  may  be  much  smaller  than  if  a  medium  price 
were  adopted.  The  owner  must  try  to  discover  what 
price  will  give  him  the  maximum  return.  Whether  this 
will  be  relatively  high  or  low  depends  on  the  nature 
of  the  demand.  It  may  happen  that  either  a  low  price 
or  a  high  price  would  give  practically  equal  results. 
It  is  clear  that  a  low  price  would  be  to  the  advantage  of 


246  ELEMENTS  OF  POLITICAL  ECONOMY 

the  public,  and  thus  so  far  there  is  a  case  for  govern- 
mental control. 

So  far  it  has  been  assumed  that  the  monopolist  charges 
the  same  price  (high  or  low)  to  all  his  customers.  It  is, 
however,  easy  to  show  that,  theoretically,  it  would  be  to 
the  advantage  of  the  owner  of  the  source  to  charge  differ- 
ent prices  to  different  consumers  according  to  the  sup- 
posed intensity  of  their  desires,  or  simply  according  to 
their  ostensible  wealth  and  the  supposed  marginal  utility 
of  their  money. 

If  in  theory  we  assume  perfect  monopoly,  it  may  be  said 
that,  just  as  perfect  comj)etition  naturally  leads  to  equality 
of  prices,  so  monopoly  leads  to  inequality.  It  is  possible 
theoretically  that  it  might  be  equally  to  the  advantage  of 
the  monopolist  and  of  the  public  that  different  prices 
should  be  charged  to  different  classes.  In  general,  how- 
ever, discriminations  of  this  kind,  in  the  case  of  monopo- 
lies, have  given  rise  to  such  abuses  that  they  have  been 
prevented.  This  suggests  a  second  ground  for  the  gov- 
ernmental regulation  of  monopolies.  Thus,  in  principle, 
railways  and  cabs  are  not  allowed  to  charge  differential 
rates.  In  the  modern  "trusts"  a  favourite  device  is  to 
charge  lower  prices  abroad,  especially  if  the  home  market 
is  protected  by  a  tariff. 

In  general  the  monopolist  must  take  into  account,  not 
only  the  conditions  of  demand,  but  those  of  supply.  Here 
different  cases  must  be  distinguished.  If  the  expenses  of 
production  are  independent  of  the  quantity  produced,  they 
merely  give  a  limiting  or  minimum  price.  The  aggregate 
revenue  must  give  at  least  this  much,  but  the  actual  price 
fixed  will,  as  before,  depend  on  demand. 


RENT  AND  VALUE  —  MONOPOLY  VALUE         247 

In  most  cases,  however,  the  aggregate  cost  will  vary  with 
the  amount  produced.  Even  if  the  product  is  subject  to  the 
law  of  increasing  return,  and  the  supply  can  be  increased  at 
a  diminishing  cost,  still  this  larger  supply  can  only  be  sold 
at  a  lower  price  per  unit,  whilst  the  total  cost  is,  of  course, 
increased.  In  a  case  of  this  kind  the  calculation  of  the 
price  that  will  give  the  greatest  net  revenue  is  a  matter 
of  great  difficulty.  It  may  be  said,  however,  that  in  gen- 
eral the  simplicity  and  the  lessened  risk  of  high  prices 
prove  most  attractive  to  the  monopolist.  Thus  it  was 
only  under  the  stimulus  of  governmental  control  that  the 
railways  discovered  that  the  low  third-class  fares  would 
give  them  the  best  return. 

A  case  of  great  theoretical  interest  is  that  of  a  change 
in  the  conditions  of  cost,  as  by  the  imposition  of  a  tax. 
Suppose  that  the  monopolist  has  discovered  the  price  that 
will  give  him  a  maximum  net  revenue,  and  that  suddenly 
a  tax  is  imposed.  Tlie  question  is,  can  he  indemnify  him- 
self wholly  or  partially  by  raising  his  price.  If  the  cost 
is  independent  of  the  quantity,  and  the  tax  is  in  the  nature 
of  a  license  to  sell,  also  independent  of  the  quantity,  he 
can  gain  nothing  by  changing  his  price.  If  the  tax  is 
heavy  enough,  it  may  stop  his  production  altogether,  but 
he  cannot  transfer  it  to  the  consumer.  In  any  case  he  has 
to  pay  the  aggregate  cost,  and  if  he  could  gain  after  the 
tax  by  raising  his  price,  he  could  have  gained  before  the 
tax  was  imposed  —  but  by  hypothesis  he  has  already  fixed 
the  best  price. 

If,  however,  the  cost  varies  with  the  quantity,  and  the 
tax  is  so  much  per  unit,  then  by  diminishing  his  supply 
he  so  far  diminishes  his  cost,  and  at  the  same  time  be  can 


248  ELEMENTS   OF   POLITICAL   ECONOMY 

sell  the  smaller  supply  at  a  higher  price  per  unit.  His 
revenue  must,  in  any  case,  be  reduced,  but  he  may  suffer 
less  by  raising  his  price  and  diminishing  his  sales.  To 
take  a  simple  illustration :  Suppose  the  tax  imposed  is 
just  equal  to  his  original  price  per  unit.  If  he  still  sells 
at  the  old  price,  he  gets  only  enough  to  pay  the  tax,  and 
he  loses  all  the  expenses  of  production.  But  if  he  raises 
the  price,  say,  by  the  amount  of  the  tax,  he  will,  indeed, 
sell  so  much  less ;  but  on  every  unit  sold  he  will  gain  the 
same  net  return  as  he  would  have  done  before  on  that 
amount. 

4.  Competition  and  Monopoly  Prices  Compared.  —  Under 
certain  conditions  monopoly  prices  may  be  more  steady 
and  uniform  than  competition  prices.  Under  competition 
the  stronger  sellers  may  strive  to  undersell  the  weaker, 
and  drive  them  from  the  market  with  the  view  of  after- 
ward establishing  a  practical  monopoly.  Thus  there  may 
be  oscillations  between  low  and  high  prices.  Again,  it 
is  not  necessary  that  monopoly  prices  should  be  higher 
than  competition  prices.  The  amalgamation  of  a  number 
of  small  concerns  may  lead  to  great  economies,  so  that  the 
monopoly  price,  though  .fixed  above  the  monopoly  cost, 
may  be  still  below  the  old  competition  price.  This  is 
the  great  argument  used  in  defence  of  trusts. 

Again,  competition  sometimes  leads  sellers  to  agree  to  a 
fixed  price,  without  restrictions  as  to  quantity.  Competi- 
tion in  this  form  may  be  very  keen  and  yet  the  consumer 
gains  nothing,  as  in  the  case  of  retail  trade  with  customary 
prices  at  a  high  level.  Here  competition  may  keep  prices 
higher  than  would  be  to  the  advantage  of  a  great 
monopolist. 


re:st  and  value  — monopoly  value       249 

In  certain  undertakings  the  public  interest  is  best  pro- 
moted by  granting  a  monopoly  to  a  company  at  any  rate 
for  a  term  of  years.  Suppose  the  undertaking  is  sucli  as 
to  require  a  large  capital,  and  to  involve  a  great  experi- 
mental risk,  whilst  if  successful  it  will  at  once  provoke 
competition ;  a  monopoly  in  such  a  case  would  be  no 
more  than  the  recognition  of  a  species  of  copyright  or 
patent. 

5.  Conditions  Requisite  to  a  Seller's  Monopoly.  —  The 
monopolist  to  succeed  must  be  able  to  regulate  both  the 
supply  and  the  price.  If  the  price  only  is  regulated,  the 
excess  of  supply  may  eventually  destroy  the  monopoly. 
It  is  not  sufficient  to  control  the  new  supplies  only ;  e.g. 
if  old  material  can  be  used,  as  in  the  case  of  copper,  or 
if  the  supply  accumulates,  as  in  the  case  of  inconvertible 
notes,  the  monopoly  price  cannot  be  maintained.  The 
case  of  the  Bank  of  England  during  the  restriction  of  cash 
payments  is  a  good  illustration.  The  notes  were  issued  at 
par  value,  and  the  issues  were  supposed  to  be  adjusted  to 
the  demands  of  trade,  and  yet  in  the  end  depreciation  set 
in,  or,  in  other  words,  the  monopoly  price  could  not  be 
maintained.  The  new  issues  were  regulated,  but  the  notes 
already  in  circulation  were  beyond  control. 

Similarly,  the  monopolist  must  be  able  to  prevent  the 
use  of  substitutes.  One  of  the  great  objections  to  the 
grant  of  patents  is  that  similar  discoveries  must  be  sup- 
pressed to  protect  the  patent  rights. 

Finally,  the  monopolist  must  be  able  to  adjust  quickly 
and  easily  both  price  and  supply  to  any  change  in  demand. 
If  with  a  fall  in  demand  he  tries  to  maintain  the  old  price, 
he  will  no  longer  obtain  the  maximum  profit  possible  under 


250  ELEMENTS   OF  POLITICAL  ECONOMY 

the  circumstances,  and  he  may  even  incur  a  loss.  If  he 
lowers  the  price  but  does  not  check  sufficiently  the  supply, 
in  the  end  his  monopoly  must  break  down. 

It  follows  that  monopoly  is  not  likely  to  succeed  in 
things  for  which  the  demand  is  variable  and  the  supply 
not  capable  of  ready  adjustment. 

In  modern  times  monopolies  are  in  general  based  not 
on  government  grants,  but  on  voluntary  combinations  of 
individuals.  Such  combinations  are  difficult  to  maintain. 
If  the  price  is  fixed  above  the  natural  competition  rate, 
there  is  the  danger  of  external  competition,  especially  if 
the  commodity  enters  into  foreign  trade  ;  and  tliere  is  also 
the  danger  of  internal  competition,  since  any  one  producer 
may,  by  various  devices,  really  lower  his  price  without 
ostensibly  infringing  the  regulations.  The  law  will  not 
enforce  contracts  in  restraint  of  trade,  and  such  voluntary 
combinations  must  depend  on  esprit  de  corps,  etc. 

6.  Buyer's  Monopoly.  —  In  a  buyer's  monopoly  the  whole 
effective  demand  is  on  the  part  of  one  individual  or  a 
group  acting  in  concert.  Accordingly,  to  effect  sales  the 
sellers  must  submit  to  the  buyer's  terms;  and  such  a 
buyer's  monopoly  may  keep  prices  below  the  natural  com- 
petition rate  for  a  considerable  time.  Thus  there  may 
be  an  effective  combination  of  employers  as  regards  the 
demand  for  some  kind  of  labour.  The  labourer  cannot 
readily  take  to  other  occupations  or  hold  out  for  a 
better  bargain,  and  thus  may  be  forced  to  accept  the 
employer's  terms.  The  only  effective  remedy  seems  to  be 
to  meet  combination  by  combination. 

An  effective  combination  of  tenants  may  keep  rents 
below  the  competition  rates,  in  which  case  part  of  the 


RENT  AND  VALUE  -  MONOPOLY  VALUE    251 

true  economic  rent  is  transferred  to  the  tenant.  Such  a 
result  is  really  obtained  when  there  is  a  low  level  of  cus- 
tomary rents.  When  anything  is  naturally  scarce  or  is 
the  subject  of  a  natural  or  artificial  monopoly,  the  price 
may  be  lowered  by  an  effective  buyer's  monopoly. 

If  a  commodity  is  produced  by  labour  and  capital  under 
the  ordinary  conditions  of  competition,  a  buyer's  monopoly 
can  only  be  successful  for  a  short  time,  as  the  labour  and 
capital  will  be  withdrawn,  or  at  any  rate  not  replaced.  In 
the  same  way  the  buyer's  monopoly  will  fail  if  the  com- 
modity attacked  can  be  transferred  to  other  uses  or  other 
places.  1 

1  Principles,  Vol.  II,  Chaps.  VII-IX.  For  historical  examples  of 
monopolies,  see  Principles,  Vol.  Ill,  Book  V,  Chap.  II.  The  effects  of 
combinations  of  labour  and  capital  on  wages  and  profits  are  discussed 
in  Principles,  Vol.  II,  Book  III,  Chap.  VIII ;  for  the  relations  of  rent 
and  value,  see  Marshall,  Principles,  Vol.  I,  Book  V,  Chap.  VIII-X  ;  and 
for  the  theory  of  monopolies,  Ibid.,  Chap.  XIII;  Hobson,  Evolution  of 
Modern  Capitalism. 


CHAPTER   V 

FUNCTIONS    AND    SYSTEMS    OF   MONEY 

1.  What  is  Money?  —  The  difficulty  involved  in  the 
definition  of  money  is  best  seen  by  considering  the  very 
different  things  that  have  performed,  and  still  perform, 
monetary  functions  of  primary  importance.  Materials  of 
all  kinds  have  been  used.  The  gold  sovereign  displaced 
the  silver  pound,  which  was  originally  a  pound  weight  of 
silver,  just  as  the  pound  of  silver  displaced  the  older  stand- 
ard of  value,  namely,  the  man  slave.  Similarly,  the  ox  was 
probably  the  origin  of  the  shilling.  Besides  gold  and  sil- 
ver, all  the  common  metals  and  a  great  variety  of  other 
things  have  been  used  as  material  money,  e.g.  corn,  oil, 
dried  fish,  tobacco,  etc.  In  the  course  of  monetary  evolu- 
tion coins  took  the  place  of  ingots  of  merchandise  ;  bank- 
notes were  issued  to  represent  coins  and  were  convertible 
into  coins  on  demand  ;  convertible  notes  suggested  incon- 
vertible notes  that  represent  nothing  but  hopes  of  deferred 
payment  ;  banks  created  by  their  credit  the  bank  money 
that  is  circulated  by  means  of  cheques  ;  and  the  cheque  is 
itself  a  development  of  the  bill  of  exchange  which  is  still 
of  the  first  importance  in  the  settlement  of  international 
transactions. 

It  is  practically  impossible  to  give  a  satisfactory  defini- 
tion of  money  that  will  cover  all  these  varieties  of  things 
that    do    the  recognised  work  of  money.     It  seems    then 

252 


FUNCTIONS   AND  SYSTEMS  OF  MONEY  253 

best  to  adopt  (though  with  a  wider  significance)  the 
phrase  of  tlie  late  Professor  Walker  £lnd  to  say  :  Money  is 
that  money  does.  We  may  then  proceed  to  consider  what 
money  does  or  the  principal  monetary  functions. 

2.  The  Primary  Functions  of  Money.  —  It  is  hardly  nec- 
essary to  illustrate  the  difficulties  of  barter.  To  avoid 
these  difficulties  something  must  be  found,  which  having 
regard  to  the  stage  of  development  of  the  society,  will  be 
universally  accepted.  This  is  the  essential  characteristic 
of  money  considered  as  a  medium  of  exchange.  At  first 
the  thing  must  be  such  that  it  is  highly  prized  on  its  own 
account,  e.g.  oxen,  slaves,  or  the  precious  metals ;  but  in 
the  course  of  time  the  monetary  function  becomes  of  such 
importance  in  itself  that  things  may  perform  the  functions 
of  a  medium  of  exchange  although  they  have  no  value  for 
other  than  monetary  purposes,  e.g.  bank-notes. 

The  importance  of  money  as  a  medium  of  exchange  is 
best  seen  in  connection  with  the  development  of  division 
of  labour.  The  substitution  of  a  money  economy  for  a 
"natural"  economy,  or  the  commutation  of  payments  in 
produce  or  in  services  into  payments  in  money,  marks  the 
course  of  progress  in  every  nation. 

We  pass  now  to  the  second  primary  function  of  money. 

It  is  plainly  impossible  to  exchange  all  sorts  of  things 
against  any  one  thing,  unless  there  is  also  some  accepted 
standard  measure  of  values.  The  function  of  money  as  a 
staridard  of  value  is  of  coordinate  importance  with  its 
function  as  a  medium  of  exchange,  and  the  two  functions 
are  intimately  connected.  It  is  not  necessary,  however, 
that  the  actual  medium  should  itself  be  the  standard ;  it  is 
sufficient  if  it  is  related  as  multiple  or  sub-multiple,  or  in 


254  ELEMENTS  OF  POLITICAL  ECONOMY 

any  definite  relation  that  is  capable  of  exact  interpretation. 
Thus  at  present  in  the  United  Kingdom  the  sovereign 
is  the  standard  unit  of  value;  and  all  values  are  meas- 
ured in  parts  and  numbers  of  sovereigns.  The  actual  pay- 
ments, however,  are  made  only  to  a  small  extent  in  gold 
coins ;  the  actual  medium  of  exchange  consists  of  bronze, 
silver,  and  paper  ;  and  of  banking  transactions  only  a  small 
fraction  are  effected  by  means  of  gold  or  coin  of  any  kind. 

The  unit  of  value  need  not  be  a  coin.  The  pound  of 
silver  was  at  first  only  coined  into  silver  pennies,  and  for 
centuries  even  the  shilling  was  only  a  money  of  account. 
It  is  worth  noting  that  in  the  mediaeval  period  money  val- 
uations were  often  adopted  for  the  purpose  of  keeping  ac- 
counts before  the  corresponding  payments  were  effected 
by  means  of  money:  e.g.  the  villein  services  were  meas- 
ured in  terms  of  money  before  they  were  actually  com- 
muted into  money  payments. 

The  difference  between  the  measure  and  the  medium 
may  be  illustrated  by  reference  to  produce,  —  say  grain 
rents.  Here  the  stipulated  rent  means  so  much  grain, 
but  the  rent  may  be  actually  paid  in  money.  In  this  case 
grain  is  the  measure  of  value,  and  money  is  the  medium 
of  exchange. 

The  standard  measure  ought  to  be  such  that  it  will 
measure  values  not  merely  in  a  particular  market  at  a 
certain  moment,  but  it  should  also  serve  as  a  standard  for 
deferred  payments. 

This  function  of  money  in  the  course  of  progress  has 
become  of  so  great  importance  that  it  is  often  described  as 
a  third  primary  function. 

Experience  shows  that  this  requisite  of  money  is  diffi- 


FUNCTIONS  AND  SYSTEMS  OF  MONEY  255 

cult  to  fulfil.  In  one  way  it  is  simple  enough  to  provide 
for  certainty  in  the  interpretation  of  contracts.  It  is  suffi- 
cient to  state  that  the  unit  of  value  is  a  certain  weisrht 
of  a  certain  substance  of  a  certain  quality,  as  we  have  in 
the  legal  definition  of  the  sovereign  or  pound  sterling. 
But  the  real  meaning  of  monetary  contracts  involves  the 
idea  not  of  weight  but  of  value.  So  long  as  inconvertible 
notes  remain  undepreciated,  they  serve  the  purposes  of 
money  equally  well  with  gold.  Even  when  depreciated, 
they  would  also  serve  equally  well  to  measure  values  and  to 
exchange  commodities  at  the  same  time  and  place.,  but  if 
from  place  to  place  or  time  to  time  their  value  changes, 
they  vitiate  so  far  the  real  meaning  of  monetary  contracts. 
The  evils  of  uncertainty  of  value  in  the  money  in  terms  of 
which  contracts  are  expressed  is  also  well  illustrated  in 
the  debasement  or  depreciation  of  a  metallic  currency. 
(See  the  famous  description  by  Macaulay  of  the  disordered 
state  of  trade  and  especially  of  wages  in  the  period  preced- 
ing the  recoinage  of  silver  in  1696.) 

Stability  of  value  over  long  periods,  or  at  least  over 
periods  for  which  monetary  contracts  are  usual,  is  then 
one  of  the  requisites  of  a  good  monetary  standard. 

It  is,  however,  easy  to  show  that  perfect  stability  of 
value  is  unattainable  except  under  the  assumption  that 
everything,  including  the  prices  of  commodities  and  ser- 
vices, is  fixed  and  stationary.  Whatever  substance  is 
chosen  as  the  material  basis  of  the  standard,  under  the 
conditions  that  at  present  prevail,  it  must  be  liable  to 
fluctuations  in  value. 

But  at  the  same  time  some  things  have  greater  com- 
parative  stability  if   we  take  as   the  test  of  stability  of 


256  ELEMENTS   OF   POLITICAL   ECONOMY 

value  their  general  purchasing  power,  which  for  monetary 
purposes  seems  the  proper  test. 

Values  depend  on  demand  and  supply,  and  causes  of 
fluctuations  in  value  may  arise  on  either  side. 

Thus  on  the  side  of  supply,  corn  and  other  forms  of 
produce  consumed  within  the  year  are  not  so  stable  as  the 
metals  which  are  relatively  durable.  Gold  in  particular  is 
not  only  durable,  but  so  precious  that  it  is  always  taken  care 
of.  Thus  the  stock  of  gold  in  the  hands  of  man  is  always 
very  large  compared  with  the  annual  supply.  And  so  far 
its  value  is  likely  to  be  more  stable  than  that  of  wheat. 

Again,  consider  the  influence  of  demand.  Some  things 
are  liable  to  disturbances  in  demand  through  changes  in 
fashion,  the  discovery  of  substitutes,  etc. ;  but  the  precious 
metals,  and  especially  gold,  are  always  valued  for  their 
own  uses  as  commodities,  to  say  nothing  of  the  monetary 
value  that  they  have  acquired  by  long  usage.  The  im- 
portance of  this  last  factor  in  demand  is  shown  very 
forcibly  by  the  recent  depreciation  of  silver,  which  is  due 
largely  to  a  falling  off  in  the  demand  for  that  metal  for 
monetary  purposes. 

The  value  of  gold  is  no  doubt  subject  to  fluctuations, 
but  it  is  doubtful  if  on  the  whole  they  are  so  great  as  to 
call  for  the  adoption  of  another  standard  on  that  account. 
Recently,  however,  the  so-called  appreciation  of  gold  led 
many  economists  and  statesmen  to  advocate  the  adoption 
of  the  double  or  joint  standard  of  gold  and  silver.  (See 
below.  Chap.  IX.) 

To  provide  against  the  evil  of  fluctuations  in  value, 
what  is  termed  the  tabular   standard  has  been  proposed. 

This  is  in  effect  an  application  of  the  theory  of  index 


FUNCTIONS  AND  SYSTEMS  OF  MONEY  257 

numbers,  or  it  may  be  considered  as  a  development  of 
grain  or  produce  rents.  According  to  this  plan  certain 
representative  commodities  are  chosen  and  their  average 
prices  for  a  certain  period  are  calculated.  If  this  original 
level  is  represented  by  100,  then  according  to  the  rise 
or  fall  in  the  average  of  these  representative  prices  at  any 
time  this  original  index  number  of  100  is  modified  by  the 
necessary  percentage.  Suppose  that  prices  measured  in 
this  way  had  risen  so  that  .£106  would  now  purchase  only 
what  was  formerly  purchased  by  £100,  then  it  is  said,  the 
purchasing  power  or  the  value  of  gold  has  fallen  in  that 
proportion,  and  that  in  equity  the  creditor  for  a  gold  loan 
ought  to  receive  X6  more  per  cent  on  the  repayment  of 
the  principal,  and  similarly  of  all  contracts  in  terms 
of  money ;  the  debtor  is  supposed  to  agree  to  pay  not  so 
much  gold  simply,  but  gold  of  so  much  purchasing  poiver 
as  measured  by  this  tabular  standard.  The  objection  to 
this  method  is  that  it  is  unworkable  in  practice.  Even 
in  the  case  of  produce  rents  it  was  found  preferable  on 
both  sides  to  take  the  speculative  risk  of  a  change  in  the 
value  of  gold. 

Sometimes  another  function  of  money  is  explicitly 
stated,  namely  that  of  a  store  of  value.  This,  however, 
seems  to  be  derivative  from  money  as  a  medium  of  ex- 
change and  as  a  standard  for  deferred  payments.  The 
early  form  of  storing  money  for  this  purpose  was  simply 
hoarding;  in  modern  times  the  chief  store  of  material 
money  is  in  the  form  of  banker's  reserves,  which  support 
a  far  greater  amount  of  representative  money.  The 
function  of  money  for  the  transfer  of  values  is  also 
derivative,  and  is  now  largely  performed  by  credit. 


268  ELEMENTS  OF  POLITICAL  ECONOMY 

3.  The  Qualities  of  Good  Metallic  Money.  —  It  is  easy  to 
show  by  reference  on  the  one  side  to  the  functions  of 
money,  and  on  the  other  to  the  qualities  of  the  various 
metals,  that  silver  and  gold  are  preeminently  suitable  for 
money.  The  money  material  ought  to  be  prized  on  its 
own  account,  and  it  should  possess  in  a  high  degree  the 
qualities  of  portability,  durability,  homogeneity  of  parts, 
divisibility,  and  cognisibility  (so  that  its  purity  is  easily 
tested).  The  latter  quality  is  of  special  importance  in  the 
case  of  coins.  A  coin  is  defined  by  Jevons  as  an  ingot,  of 
which  the  weight  and  fineness  are  certified  by  the  integ- 
rity of  the  designs  impressed  upon  the  surface  of  the 
metal.  It  is  important  that  coins  should  show  not  only 
the  original  fineness  and  weight,  but  the  absence  of  any 
subsequent  alteration. 

In  former  times  false  coinage  was  very  general.  At 
first,  as  usual,  a  remedy  was  sought  for  in  the  severity 
of  the  punishment;  but  here,  as  elsewhere,  it  was  found 
that  prevention  was  a  more  efficient  remedy  than  retribu- 
tion. Accordingly,  in  the  course  of  progress  we  find  more 
and  more  elaborate  devices  adopted  so  as  to  make  imita- 
tion difficult.  When  the  coins  were  hammered,  the  im- 
pression was  feeble  and  the  size  irregular,  and  clipping 
and  sweating  were  encouraged;  the  elaborate  machinery 
of  the  modern  mint  cannot  be  readily  made  or  worked  in 
secret. 

The  design  on  the  coins  is  not  only  of  interest  as  a  his- 
torical record  and  as  indicating  the  extent  of  the  king's 
peace,  but  it  prevents  counterfeiting  and  the  fraudulent 
removal  of  the  metal.  The  design  should  also  be  so  con- 
trived as  to  reduce  the  natural  wear  and  tear  to  a  mini- 


FUNCTIONS  AND  SYSTEMS  OF  MONEY  259 

mum.  Under  present  conditions,  when  a  large  quantity 
of  silver  is  current  in  different  countries  as  full  legal 
tender,  although  far  below  half  its  nominal  or  metallic 
value,  the  necessity  of  preventing  fraudulent  imitation 
is  of  great  importance. 

Coins  have  been  made  of  all  degrees  of  weight,  and 
the  only  rule  that  can  be  laid  down  is  the  rule  of  con- 
venience. When  the  silver  penny  was  the  only  coin,  it 
was  too  valuable  for  some  payments,  and  too  bulky  for 
others ;  to  remedy  the  first  evil,  leather  tokens  were  is- 
sued ;  and  to  avoid  the  second,  gold  coins  of  foreign  make 
were  used. 

4.  Systems  of  Metallic  Money.  —  The  simplest  and  the 
most  ancient  system  of  metallic  money  is  currency  by 
weight.  The  French  livre  and  the  Italian  lira^  like  the 
English  and  Scottish  pounds,  refer  originally  to  the  pound 
weight  of  silver.  In  this  system  the  currency  is  practi- 
cally a  form  of  merchandise.  Such  a  system,  when  found 
at  present,  is  a  sign  of  backwardness  in  a  nation  (China). 
It  may  also  be  resorted  to  in  the  case  of  a  depreciation  of 
the  actual  coinage,  when  the  depreciation  is  recognised, 
and  is  not  counteracted  by  restriction  of  the  quantity. 
(See  below.  Chap.  VII.)  In  international  payments  the 
exchanges  are  based  upon  the  weights  of  the  coins  (the  fine 
metal),  and  remittances  are  often  made  in  bars. 

In  the  system  of  parallel  standards,  two  or  more  metals 
are  coined,  but  no  attempt  is  made  to  regulate  by  law 
their  relative  values.  This  method  is  so  inconvenient  as 
to  be  impracticable.  When  it  is  actually  found,  it  is  in 
general  the  result  of  a  breakdown  of  a  system  of  bimet- 
allism, in  which  the  legal  ratio  is  no  longer  recognised. 


260  ELEMENTS   OF   POLITICAL   ECONOMY 

Of  this  there  are  several  examples  in  English  monetary 
history  which  had  important  consequences. 

In  the  single  legal  tender  system  only  one  metal  is  used 
(generally  silver),  as  in  the  old  English  system.  As 
already  noticed,  silver  alone  is  inconvenient. 

The  inconveniences  of  the  single  legal  tender  are  reme- 
died by  the  composite  legal  tender  system.  The  present 
English  system  is  an  example  of  this  plan.  One  metal 
(gold)  is  full  legal  tender  to  any  extent,  whilst  silver  and 
bronze  are  token  money  of  limited  legal  tender. 

Jevons,  from  whom  these  significant  terms  are  derived, 
also  uses  the  term  multiple  legal  tender  system.  On  this 
plan  two  or  more  metals  are  full  legal  tender  at  ratios 
fixed  by  law.  The  most  important  case  is  bimetallism. 
(See  below,  Chap.  IX.)  To  these  may  be  added  the 
suspended  coinage  system,  which  has  resulted  from  the 
breakdown  of  bimetallism  in  recent  times.  In  France 
and  other  countries  silver  is  still  full  legal  tender,  but  to 
keep  up  its  value  it  is  no  longer  coined  for  this  purpose. 
In  India,  also,  the  coinage  of  silver  has  been  suspended, 
as  an  indirect  consequence  of  the  breakdown  of  bi- 
metallism, which  dislocated  the  foreign  exchanges  and 
embarrassed  the  Indian  government.  ^ 

1  This  chapter  is  abbreviated  from  Principles,  Book  III,  Chaps.  XI 
and  XII  ;  see  also  Nicholson,  Money  and  Monetary  Problems  and 
Bankers''  Money;  Jevons,  Money;  Walker,  Money. 


CHAPTER  VI 

THE  QUANTITY  THEORY  OP  MONEY 

1.  A  Hypothetical  Market.  —  The  quantity  theory  of 
money  is,  perhaps,  the  best  example  of  the  abstract  de- 
ductive method.  We  begin  with  certain  hypothetical 
conditions,  and  gradually  introduce  more  and  more  dis- 
turbing forces,  until  we  arrive  at  the  complex  relations 
of  the  present  commercial  world.  The  object  of  the 
theory  is  to  explain  the  causes  that  determine  the  ex- 
change value  of  money,  or  the  general  level  of  prices, 
according  to  the  standard  considered. 

It  is  to  be  observed  that,  although,  as  in  dealing  with 
relative  values,  we  begin  with  a  very  abstract  statement 
of  conditions,  from  the  outset  we  are  dealing  with  real 
causes.  The  point  is  that  for  the  time  being  we  abstract 
or  take  away  other  causes  that  are  introduced  at  subse- 
quent stages. 

Suppose  then  that  a  market  is  set  up  under  the  follow- 
ing conditions :  No  exchanges  are  to  be  made  without 
money  passing  from  hand  to  hand  at  every  transaction, 
thus  excluding  credit  and  barter.  The  money  is  to  be 
considered  as  of  no  utility  except  for  immediate  exchanges  ; 
that  is,  there  is  no  hoarding  or  reservation  of  the  money. 
This  condition  implies  that  all  the  money  is  to  be  put 
into  circulation,  and  is  made  explicit  by  saying  that  every 

261 


262  ELEMENTS  OF  POLITICAL  ECONOMY 

piece  of  money  is  to  be  used  at  least  once  in  the  inter- 
change of  the  commodities  in  the  market.  It  is  also 
assumed  that  all  the  commodities  must  be  exchanged  for 
money,  that  all  are  on  sale,  and  sold  for  the  best  price 
obtainable.  Under  these  simple  and  fixed  conditions, 
the  value  of  the  money  will  vary  inversely  with  its  quan- 
tity: in  other  words,  the  level  of  prices  will  depend  on 
the  quantity  of  money  on  the  one  side,  and  on  the  com- 
modities to  be  exchanged  on  the  other.  Thus,  if  the 
money  were  increased  tenfold  (the  commodities  and  the 
exchanges  remaining  the  same),  prices  would  rise  tenfold; 
and  similarly  of  a  diminution  of  the  money  and  a  fall 
in  prices. 

Although  the  rise  and  fall  in  general  prices  is  only 
exactly  proportioned  to  the  increase  and  decrease  of  quan- 
tity under  these  or  similar  hypothetical  conditions,  the 
quantity  of  the  money  is  always  a  factor  of  the  first  im- 
portance. Thus  the  great  rise  in  prices  that  took  place 
in  the  sixteenth  century  is  explained  by  the  great  dis- 
coveries of  silver.  Similarly,  the  fall  in  the  value  of 
gold  after  1850  was  ascribed  to  the  gold  discoveries  in 
Australia  and  California.  The  best  illustration,  as  will 
be  shown  later  (see  Chap.  VII)  is  found  in  the  depre- 
ciation of  inconvertible  notes  through  excessive  issues. 

It  must  be  observed,  however,  even  at  this  early  stage 
of  the  exposition  of  the  theory,  that  the  quantity  alone 
is  not  sufficient  to  explain  the  changes  in  the  value  of 
gold  as  is  shown  by  the  slight  effect  of  the  far  greater 
discoveries  of  recent  times.  Even  inconvertible  notes, 
it  will  be  shown,  may  be  depreciated  without  excessive 
issues,  and  with  excessive  issues  may  escape  depreciation. 


THE  QUANTITY  THEORY  OF  MONEY     263 

We  must  then  look  for  other  causes,  besides  the  quantity, 
which  affect  the  value  of  money. 

2.  Influences  modifying  that  of  Quantity.  —  Suppose, 
now,  that  in  effecting  a  given  amount  of  transactions 
each  piece  of  money  in  this  same  hypothetical  market  is 
used  a  number  of  times  instead  of  once  only.  It  is  easy 
to  see  that  this  must  have  the  same  effect  on  the  level 
of  prices  as  if  the  quantity  of  money  were  increased  in 
like  proportion.  The  increase  in  the  number  of  times 
the  money  is  used  is  described  as  an  increase  in  the 
rapidity  of  circulation.  The  phrase  is  open  to  objection 
(Mill),  but  it  answers  well  enough  if  the  idea  is  made 
clear ;  and  this  is,  perhaps,  best  accomplished  by  a  simple 
example.  Suppose,  then,  that  at  fu'st  there  are  ten 
things,  and  one  hundred  pieces  of  money,  and  let  the 
things  be  of  equal  value  in  the  eye  of  the  only  possessor 
of  the  money.  He  will  then  give  ten  pieces  for  each 
thing;  and  each  piece  of  money  is  used  once  only  in 
effecting  these  ten  exchanges.  If,  however,  the  man 
of  money  only  desired  one  thing,  and  gave  all  the  money 
for  that  thing,  and  the  receiver  passed  it  on  in  the  same 
way  in  one  lump  to  his  neighbour  in  the  market,  and  so 
on  through  the  whole  set  of  things  and  merchants,  each 
thing  would  be  sold  for  one  hundred  pieces  instead  of 
ten ;  and  the  essential  point  of  difference  is  that  each 
piece  of  money  is  used  ten  times  instead  of  once. 

This  influence  also  may  be  illustrated,  though  not  so 
sharply,  by  reference  to  actual  commerce.  Thus,  if 
money  circulates  rapidly,  a  less  quantity  will  suffice  to 
keep  up  a  certain  level  of  prices.  Again,  with  improve- 
ments in  the  means  of  communication  and  of   transport, 


264  ELEMENTS   OF   POLITICAL   ECONOMY 

money  circulates  more  rapidly,  or,  to  adopt  Mill's  phrase, 
the  efficiency  of  the  money  is  increased,  and  so  far  prices 
rise.  Other  modifying  influences  are  more  obvious  in 
their  effects.  In  all  cases,  however,  it  is  best  to  compare 
these  effects  to  those  of  a  corresj^onding  increase  or 
diminution  in  the  quantity  of  the  money. 

An  increase  in  the  volume  of  the  trade  is  equivalent  to 
a  decrease  in  the  quantity  of  money  or  so  far  prices 
fall.  Thus,  after  the  great  discoveries  of  silver  in  the 
sixteenth  century  the  rise  in  prices  was  partly  checked 
by  the  increase  in  the  volume  of  trade. 

Suppose  now  that  some  of  the  exchanges  of  com- 
modities are  effected  without  the  intervention  of  money, 
as  b}^  direct  barter.  This  is  equivalent  in  its  effect  to  an 
increase  in  the  quantity  of  money.  A  certain  amount 
of  money  is  set  free  to  exchange  the  other  things. 

Next  let  us  take  account  of  the  fact  that  the  money 
material  (say,  gold)  has  itself  great  utility  apart  from  its 
monetary  functions ;  which,  to  begin  with,  is  one  of  the 
requisites  of  a  good  medium  of  exchange.  In  this  case 
the  use  of  the  gold  for  these  other  purposes  will  so  far 
diminish  the  supply  available  for  money,  and  thus  prices 
will  be  so  much  lower.  At  present  the  use  of  gold  in  the 
arts,  and  for  ornament,  plate,  etc.,  is  very  great,  and  it 
has  always  been  so.  Large  quantities  have  been  ex- 
ported to  the  East  and  there  hoarded ;  and  in  the  West 
a  large  mass  of  gold  is  hoarded  by  the  great  military 
nations  of  Europe  in  tlieir  war  chests.  Similarly,  a  great 
part  of  the  reserves  of  gold  held  in  the  European  na- 
tional banks  has  j)ractically  no  monetary  influence:  to 
all  intents  and   purposes  it   is   hoarded. 


THE  QUANTITY  THEORY  OF  MONEY     265 

Tlie  use  of  gold  for  industrial  purposes  illustrates 
very  clearly  the  distinction  between  the  price  of  gold 
and  its  value.  The  price  is  fixed  by  law.  All  that  this 
means  in  reality  is  that  a  certain  amount  of  gold  can 
always  be  made  into  a  certain  number  of  sovereigns. 
Thus,  at  present,  the  English  mint  will  make  out  of  an 
ounce  of  standard  gold  (i.e.  fine  gold  with  a  fixed  pro- 
portion of  alloy)  three  sovereigns,  and  the  fraction  of 
a  sovereign  that  corresponds  to  seventeen  shillings  and 
tenpence  halfpenny  is  left  over  :  in  brief,  the  mint 
price  of  gold  is  X3  17s.  l()\d.  But  the  purchasing  power 
of  this  gold  is  subject  to  constant  variations.  Suppose, 
then,  that  owing  to  very  great  abundance  of  gold  or  any 
other  cause  prices  rise  very  much,  then  the  money  in- 
comes of  people  will  also  rise ;  and  if  the  price  of  gold 
were  to  remain  the  same,  every  one  would  be  willing  to 
spend  more  on  gold  ornaments.  Thus  the  gold  would, 
to  this  extent,  be  withdrawn  from  circulation,  and  so 
far  prices  would  again  fall. 

3.  Cost  of  Production  of  Gold  in  Relation  to  its  Value.  — 
The  quantity  of  gold  can  only  be  increased  at  any  time 
under  certain  conditions  at  an  increasing  cost.  Thus 
gold  considered  as  a  metal  would  appear  to  have  its 
value  determined  by  the  marginal  cost,  as  in  the  case  of 
other  commodities  produced  according  to  diminishing 
return.  If,  then,  we  also  take  for  granted  that  an  equal 
weight  of  gold  in  the  form  of  coins  must  be  of  just  the  same 
value  as  the  same  weight  of  gold  bullion  (which  is  obvious 
if  there  is  no  charge  for  mintage  and  no  restriction  on  coin- 
age) then  the  value  of  gold  money  seems  to  be  determined 
by  the  marginal  cost  of  the  production  of  gold  bullion. 


I 


266  ELEMENTS  OF   POLITICAL  ECONOMY 

This  reasoning  is,  however,  fallacious.  The  value  of 
gold,  as  so  often  insisted  on,  must  mean  its  value  com- 
pared with  other  things,  and  for  general  purposes  we 
must  take  its  general  purchasing  power;  that  is,  the 
value  of  gold  varies  with  the  level  of  general  prices.  It 
is  obvious,  even  at  the  present  stage  of  the  argument, 
that  the  level  of  prices  must  depend  on  a  number  of 
influences  besides  the  marginal  cost  of  gold.  Such  are, 
for  example,  the  volume  of  trade  and  the  rapidity  of 
circulation:  an  increase  in  trade  might  more  than  neu- 
tralise an  increase  of  gold  due  to  a  fall  in  the  marginal 
cost,  and  an  increase  in  the  rapidity  of  circulation  might 
raise  prices  or  lower  the  value  of  gold  in  spite  of  a 
falling  off  in  the  annual  supply,  and  an  increase  in  the 
marginal  cost.  As  will  appear  later,  the  influence  of 
credit  on  prices  in  modern  conditions  is  of  the  greatest 
importance ;  and  it  is  clear  that  if  money  were  compelled 
to  pass  from  hand  to  hand  (as  at  first  assumed)  in  every 
transaction,  to  keep  up  the  present  level  of  prices  the 
sovereign  must  be  reduced  to  the  size  of  a  grain  of 
sand. 

But  leaving  for  the  present  the  influence  of  credit  and 
representative  money,  the  fallacy  of  the  argument  under 
review  appears  from  another  consideration.  The  annual 
supply  is  only  a  small  part  of  the  total  supply,  and  of  this 
annual  supply  only  a  small  part  is  produced  at  the  mar- 
ginal cost.  Thus  at  any  time,  or,  say,  over  a  period  of  ten 
years,  the  marginal  cost  can  have  but  a  small  effect  on  the 
quantity  of  gold  money.  In  any  case,  however,  the  value 
of  gold,  as  of  all  other  things,  must  depend  on  demand  as 
much  as  on  supply,  and  the  demand  for  gold  is  governed 


THE  QUANTITY  THEORY  OF  MONEY     267 

by  the  work  which  it  has  to  do  in  effecting  monetary 
transactions. 

The  truth  then  appears  to  be  that  at  any  time  the  value 
of  gold  (or  the  range  of  prices)  is  one  of  the  factors  which 
determine  how  far  the  margin  of  gold-mining  will  be 
pushed.  If,  owing  to  a  general  rise  in  prices,  the  price  of 
labour  and  of  machinery  and  of  all  the  requisites  of  gold 
production  also  rise,  then  so  far  the  margin  will  recede : 
the  gold  extracted  at  the  old  margin  will  no  longer  suffice 
to  make  coins  enough  to  pay  for  the  labour,  etc.,  required. 
This  recession  of  the  margin  will,  in  its  turn,  so  far  lessen 
the  quantity  of  the  annual  supply  of  gold  and  thus  affect 
also  the  amount  available  for  money.  In  this  way  the 
cost  of  production  of  gold  at  any  time  or  over  any  short 
period  has  an  effect,  though  relatively  slight,  on  the  value 
of  gold  (or  the  general  level  of  prices  measured  in  gold). 

It  is,  however,  worth  pointing  out  that  if  we  consider 
very  long  periods,  the  cumulative  effects  of  small  causes 
may  be  very  great.  Gold  was  produced  in  prehistoric 
times,  and  the  actual  supply  of  gold  at  the  present  time  is 
the  result  of  the  expenditure  of  labour  and  capital  in  the 
past.  It  is,  then,  no  doubt  true  to  say  that  had  it  not  been 
for  the  difficulty  in  production,  especially  in  the  past,  the 
quantity  of  gold  would  now  be  so  much  greater  and  the 
level  of  prices  so  much  higher.  There  is  one  case  in  which 
cost  of  production  is  of  special  interest ;  namely,  in  consid- 
ering the  relative  values  of  gold  and  silver.  It  is  no  doubt 
true  that  the  recent  depreciation  of  silver  relatively  to  gold 
is  due  much  more  to  changes  in  demand  than  in  supply. 
But  when  we  take  into  account  very  long  periods  so  as  to 
consider  the  cost  of  producing  the  aggregate  in  the  hands 


268  ELEMENTS  OF  POLITICAL  ECONOMY 

of  man,  then  one  reason  why  silver  has  always  been  so 
much  less  valuable  than  gold  is  that  it  has  always  been 
produced  at  less  cost.  We  have  no  records  of  the  actual 
cost  of  either  metal,  and  the  evidence  is  rather  of  a  geolog- 
ical character;  but  it  is  in  geology  that  the  effects  of 
cumulative  causes  are  best  seen.^ 

1  For  fuller  statement  of  the  quantity  theory  on  the  same  lines,  see 
Money  and  Monetary  Problems  ;  and  for  the  older  view  (especially  as 
regards  the  influence  of  cost),  Mill,  Principles,  Book  III,  Chap.  VIII  and 
IX. 


CHAPTER  VII 

GRESHAM'S  law — TOKEN  COINS  —  INCONVERTIBLE  NOTES 

1.  Gresham's  Law.  —  The  economic  tendency  now  usu- 
ally described  as  Gresham's  law  in  its  popular  form  asserts 
that  bad  money  drives  good  money  from  circulation,  and 
conversely  good  money  will  not  displace  bad  money.  A 
preferable  mode  of  statement  which  calls  attention  to  the 
real  meaning  is :  There  is  an  alternative  use  for  good 
mone}^  (or  its  material)  for  melting  or  export,  and  if  it  is 
worth  more  for  other  uses,  it  will  not  be  paid  away  as  coin. 

Suppose  that  a  large  part  of  the  actual  coinage  of  a 
country  has  fallen  below  the  legal  weight,  as  was  the  case 
with  the  English  silver  before  the  great  recoinage  of  1696. 
Suppose,  also,  that  the  light  mone)"",  or  a  good  deal  of  it, 
still  passes  by  tale,  and  that  people  have  not  yet  reverted 
to  currency  by  weight.  Under  these  conditions  the  best 
coins  will  be  chosen  for  export  or  use  in  the  arts,  because 
their  metallic  value  is  greater,  whilst  as  money  (by  tale) 
they  will  only  have  the  value  of  the  worst  coins  that  are 
accepted.  Thus  in  the  course  of  time  the  better  coins  will 
disappear,  or  in  other  words  the  aggregate  coinage  will  get 
worse  and  worse.  The  operation  of  Gresham's  law  in  tliis 
case  depends  entirely  on  the  fact  that  the  coin  has  two 
values.  If  all  the  coin  were  weighed  and  passed  at  the 
weight  value,  the  good  money  would  have  an  extra  value 
as  coin,  just  as  it  has  as  bullion. 

269 


270  ELEMENTS  OF  POLITICAL  ECONOMY 

If,  under  the  conditions  at  first  laid  down,  the  government 
were  to  issue  a  mass  of  new  full-weight  coins  without  effec- 
tively withdrawing  the  old  coins  from  circulation,  these 
good  coins  would  disappear,  as  the  law  states. 

Like  all  other  economic  tendencies,  this  law  is  liable  to 
be  counteracted.  Just  recently,  in  England,  for  example, 
a  large  part  of  the  gold  coinage  was  below  the  legal 
weight,  but  the  good  coins,  as  they  were  issued,  remained 
in  circulation.  The  light  coins  were  accepted  as  readily 
as  the  Bank  of  England  notes  payable  on  demand  in  full- 
weight  coins,  or  as  the  full-value  coins  themselves.  The 
question  arises :  How  is  it  that  for  monetary  purposes 
bad  coins  can  remain  on  the  same  level  with  good 
coins,  or  that  good  coins  cannot  be  sold  for  more  bad 
coins  ? 

The  first  answer  is  that  by  gradual  and  habitual  use 
people  have  been  accustomed  to  the  inferior  coins,  and 
that  the  law  which  enjoins  people  to  refuse  coins  below 
the  proper  weight  is  not  observed,  and  probably  in  most 
cases  not  known.  It  suffices  for  most  people  to  know  that 
they  in  turn  can  pass  on  the  coins.  If,  however,  there 
were  any  difficulty  in  getting  rid  of  the  light  coins,  the 
depreciation  would  be  recognised;  the  good  coins  would 
have  a  greater  value  for  certain  purposes,  and  would  be 
withdrawn  from  circulation.  Such  a  selective  process  had 
begun  in  England  before  the  recent  restoration  of  the  gold 
coinage.  The  Bank  of  England  only  accepts  gold  by  weight, 
and  this  bank  is  the  bankers'  bank  ;  that  is  to  say,  it  holds 
the  ultimate  real  reserve  of  the  other  banks,  and  all  super- 
fluous gold  is  returned  to  the  Bank  of  England.  Thus 
the  ordinary  banks,  in  their  own  interest,  would  return  the 


TOKEN   COINS  271 

light  gold  to  circulation,  and  send  the  better  coins  to  the 
Bank  of  England. 

Apart  from  habit,  however,  there  is  a  much  more  effec- 
tive force  that  keeps  up  the  value  of  the  light  coins.  This 
is  the  principle  of  limitation.  With  a  certain  level  of 
prices,  and  a  certain  amount  of  monetary  transactions  to  be 
effected,  a  certain  quantity  of  money  is  necessary.  Thus, 
however  small  the  metallic  value  of  the  coins,  if  they  are 
limited,  they  may  keep  up  their  nominal  value.  It  is  this 
principle  of  limitation  that  explains  most  of  the  cases  in 
which  coins  are  kept  in  circulation,  although  far  below  the 
metallic  value  of  other  coins  that  pass  at  the  same  nominal 
value.  The  silver  coins,  for  example,  in  France  and  other 
countries  have  not  shared  in  the  depreciation  of  the  metal- 
silver;  their  value  has  been  kept  up  only  by  the  suspen- 
sion of  the  coinafje. 

Experience  shows  that  if  the  mints  are  open  for  both 
metals,  a  very  slight  difference  will  suffice  to  make  the 
worse  (or  overvalued)  coin  drive  the  better  (or  under- 
valued) coin  from  circulation.     (See  next  chapter.) 

2.  Token  Coins.  —  The  principles  examined  in  the  last 
section  explain  the  regulations  that  have  been  found  neces- 
sary to  keep  the  token  coins  of  a  country  on  a  proper  foot- 
ing. Token  coins  are  coins  the  metallic  value  of  which  is 
avowedly  and  designedly  below  the  nominal  value,  e.g 
the  silver  and  bronze  in  England. 

It  follows  at  once,  from  the  definition,  that  it  is  neces- 
sary to  limit  the  right  of  coinage.  If,  under  existing  con- 
ditions, any  one  could  take  silver  to  the  mint  and  have  it 
coined  into  shillings,  etc.,  there  would  be  a  profit  of  about 
175  per  cent  on  every  transaction,  at  the  present  price  of 


272  ELEMENTS  OF  POLITICAL  ECONOMY 

silver  (24c?.).  In  the  seventeenth  century,  in  England, 
private  tokens  were  allowed  to  be  issued  to  any  extent, 
and  there  were  naturally  excessive  issues.  From  1648  to 
1672  there  were  over  twenty  thousand  different  kinds  of 
tokens.  Somewhat  earlier  London  had  been  flooded  with 
the  token  farthings  that  had  been  issued  by  the  patentees 
to  whom  the  crown  had  sold  the  right,  and  people  were 
sometimes  forced  to  take  as  much  as  twenty  shillings'  worth. 
It  may  be  noted  that,  apart  from  the  danger  of  excess,  the 
issue  of  private  tokens  is  subject  to  the  great  disadvantage 
of  want  of  uniformity  —  as  shown  by  the  example  quoted 
above.  This  want  of  uniformity  is  fatal  to  efficiency  as  a 
medium  of  exchange,  and  many  of  these  tokens  did  not 
circulate  beyond  a  particular  street. 

To  protect  the  limitation  of  the  coinage  of  tokens  they 
are  in  general  limited  as  legal  tender  to  a  certain  maxi- 
mum, e.g.  in  England  40s.  for  silver.  This  limitation 
also  has  the  advantage  of  securing  the  convenience  of 
people  —  they  are  not  obliged  to  accept  masses  of  silver. 

The  recent  experience  of  many  countries  shows  that  the 
limitation  of  legal  tender  is  not  essential  to  token  money 
if  the  coinage  is  strictly  limited;  and  as  regards  the  conven- 
ience of  people,  it  is  found  sometimes  that  there  is  a  defi- 
ciency of  silver.  The  aim  of  the  government  is  not  profit, 
but  to  answer  the  requirements  of  trade,  and  the  estimates 
may  be  underrated.  Recentl}',  in  some  of  the  manufactur- 
ing towns  of  England  there  was  a  dearth  of  farthings,  to 
the  inconvenience  of  the  poorer  classes.  The  sole  object  of 
token  coins  is  to  promote  the  convenience  of  people.  Were 
it  not  for  this,  all  the  coins  might  be  of  gold,  and  the  gold 
penny  would  be  about  the  weight  of  half  a  grain  of  wheat. 


INCONVERTIBLE  NOTES  273 

3.  Inconvertible  Notes.  —  Inconvertible  notes,  as  the  name 
implies,  are  bank-notes,  the  conversion  of  which  into  coin 
(e.g.  gold)  is  suspended,  or  indefinitely  postponed.  As 
they  arise,  in  fact,  from  the  degradation  of  convertible 
notes,  it  might  be  thought  that  the  theory  of  convertible 
notes  should  be  treated  first.  In  fact,  however,  the  issues 
and  the  value  of  inconvertible  notes  are  determined  by 
quite  different  principles,  and  the  reason  for  taking  the 
theory  of  inconvertible  paper  at  this  stage  is  that  it  forms 
the  best  illustration  of  the  quantity  theory  of  money. 

The  conditions  under  which  these  notes  are  issued  con- 
form more  nearly  to  the  original  conditions  of  our  hypo- 
thetical market  than  do  the  conditions  that  affect  the 
actual  circulation  of  gold.  The  notes  have  no  value  except 
as  money,  and  as  a  rule  people  are  reluctant  to  keep  them 
for  any  time  through  fear  of  depreciation ;  in  consequence 
they  are  thrown  into  circulation.  Again,  after  a  certain 
point  has  been  reached  in  their  issues,  any  further  issue  has 
an  immediate  effect  on  prices;  and  if  we  suppose  that  the 
other  modes  of  exchange  (through  barter  or  credit)  remain 
the  same,  we  can  apply  the  logical  method  of  difference. 

In  nearly  all  cases  in  which  inconvertible  notes  have  been 
issued  they  have  become  depreciated.  Such  depreciation 
may  be  estimated  in  reference  to  the  standard  which  these 
notes  are  supposed  to  represent  (e.g.  gold)  or  in  reference 
to  commodities.  We  may  consider  first  the  depreciation 
relatively  to  gold.  As  throughout  monetary  theory,  it  is 
necessary  to  adopt  the  abstract  deductive  method. 

Take,  then,  an  isolated  country  and  suppose  that  to  begin 
with  it  has  a  currency  of  two  million  gold  sovereigns.  Let 
the  government  issue  a  million  of  inconvertible  notes  scat- 


274  ELEMENTS  OF   POLITICAL   ECONOMY 

tered  up  and  down  the  country  in  payment  for  all  kinds 
of  things,  so  that  the  notes  are  effectively  circulated  at 
once.  Then  by  the  quantity  theory,  other  things  remain- 
ing the  same,  general  prices  will  rise  ;  and  therefore  if  all 
prices  rise,  in  theory  gold  also  must  rise  in  price,  i.e.  gold 
bullion ;  and  therefore  gold  coins  will  be  melted  down  so 
long  as  there  is  any  difference  in  price  (Gresham's  law). 
Ultimately  general  prices  will  be  restored  to  the  former 
level,  the  only  difference  being  that  a  million  of  notes  has 
displaced  a  million  of  gold  from  the  circulation. 

At  this  point  let  another  million  of  notes  be  issued ;  the 
same  process  will  take  place,  and  all  the  gold  will  event- 
ually be  driven  from  circulation.  Suppose,  next,  that 
when  there  is  no  more  gold  in  circulation  another  million 
of  notes  is  issued,  then,  as  before,  all  prices  rise ;  but  now, 
since  there  is  no  gold  to  displace  the  mass  of  the  currency, 
it  remains  inflated,  and  according  to  the  pure  quantity 
theory  all  prices  will  have  risen  by  one-half.  Inter  alia 
the  price  of  gold  measured  in  notes  will  have  risen  fifty 
per  cent ;  and  this  premium  on  gold,  as  it  is  termed,  is  the 
measure  of  the  depreciation  of  the  notes  compared  with 
standard  money. 

We  must  now  bring  in  various  influences  and  conditions 
that  modify  the  action  of  the  pure  theory. 

Gold  may  still  remain  in  circulation,  the  premium  being 
recognised  or  allowed  for  when  payments  are  made  in  gold. 
In  this  case  it  may  be  shown  that  the  depreciation  of  the 
notes  relatively  to  gold  will  be  somewhat  less,  and  rela- 
tively to  commodities  somewhat  greater,  than  if  all  the 
gold  were  thrown  on  the  bullion  market  of  the  particular 
country. 


INCONVERTIBLE  NOTES  275 

The  paper  may  become  depreciated  before  there  is  any 
excess  of  issues  simply  because  it  is  discredited.  In  fact, 
this  element  of  possible  discredit  must  always  be  taken 
account  of,  though  not,  as  some  writers  have  supposed,  to 
the  exclusion  of  the  quantity. 

In  the  modern  world  no  country  is  in  reality  isolated, 
and  the  gold  may  be  exported.  This  is  in  fact  the  general 
rule  ;  exports  of  gold  cannot  be  prevented  and  will  prob- 
ably be  stimulated,  because  as  prices  rise  importation  into 
the  country  is  encouraged,  and  the  adverse  balance  will  be 
met  in  the  first  place  by  the  export  of  gold. 

Finally,  it  may  happen  that  in  some  cases  the  paper  will 
not  be  depreciated  in  proportion  to  the  excess  of  issues  be- 
cause, under  the  conditions  prevailing  at  the  time,  more 
currency  is  required.  Thus  inconvertible  notes  are  often 
issued  in  times  of  war  or  rumours  of  war,  and  at  such 
times  there  is  a  reluctance  to  accept  the  ordinary  forms  of 
credit  and  the  usual  representatives  of  money.  Thus  there 
may  be  room  for  a  larger  quantity  of  notes.  Again,  a  state 
of  war  always  leads  to  exceptional  demands  for  gold,  and 
the  place  of  gold  in  the  currency  must  be  taken  by  the 
notes  (as  in  the  early  stages  of  the  American  Civil  War). 

But  whatever  modifications  take  place,  the  quantity  is 
always  of  fundamental  importance ;  after  a  certain  amount 
of  notes  have  been  issued,  no  matter  what  the  credit  of  the 
government  or  what  the  notes  are  supposed  to  "represent," 
they  will  be  depreciated.  The  only  effective  safeguard 
against  depreciation  is  limitation  of  issues.  The  idea  of 
representation  is  only  of  use  in  checking  depreciation  in 
so  far  as  it  affects  the  quantity  in  circulation.  Thus,  if  it 
is  supposed  that  at  some  time  the  notes  will  be  made  con- 


276  ELEMENTS  OF  POLITICAL  ECONOMY 

vertible,  a  certain  number  will  be  withdrawn  from  circula- 
tion, and  so  far  this  contraction  of  the  currency  will  lower 
prices  and  check  the  depreciation.  Similarly,  if  the  issuers 
of  the  notes  make  them  "  represent  "  anything  that  is 
limited,  —  though  not  at  once  obtainable, — so  far  the  issues 
will  be  checked.  In  the  period  of  the  bank  restriction 
in  England,  when  the  directors  issued  their  notes  in  re- 
sponse to  the  bona  fide  demands  of  trade,  for  a  long  time 
this  "  rule  of  thumb  "  limitation  sufficed  to  stop  deprecia- 
tion ;  though  it  failed  in  the  end,  as  the  notes  overflowed 
the  natural  channels  of  circulation. 

4.  The  Evils  of  Depreciation  of  Notes.  —  The  evils  that 
arise  from  the  depreciation  of  inconvertible  notes  are 
readily  seen  from  a  consideration  of  the  functions  of 
money. 

The  uncertainty  of  the  extent  of  the  depreciation  makes 
them  such  a  bad  standard  for  deferred  payments  that,  in 
spite  of  severe  penalties,  people  often  insist  on  making 
their  contracts  in  terms  of  gold ;  and  it  must  be  remem- 
bered that  in  the  modern  world  most  exchanges  involve, 
directly  or  indirectly,  an  element  of  time.  Amongst  the 
evils  that  arise  from  a  depreciated  standard  we  may  notice: 
creditors  are  defrauded ;  trade  is  rendered  uncertain  and 
speculative  —  "  commerce  is  dead,  and  betting  has  taken 
its  place ; "  the  issue  of  the  notes  is,  in  effect,  a  most  un- 
just method  of  taxation,  the  only  justification  of  which  is 
its  necessity  at  times  of  national  urgency ;  there  is  a  loss 
of  credit  at  first  national,  and  then  reflected  to  individuals ; 
in  extreme  cases  there  is  an  increase  of  crime  through  the 
encouragement  to  forgery  (especially  when  the  notes  are 
of  small  denominations),  and  through  the  evasion  of  the 


THE  EVILS  OF  DEPRECIATION  OF  NOTES       277 

regulations  forbidding  the  use  of  gold ;  and  in  the  last  re- 
sort even  the  government  cannot  get  its  work  done,  and 
cannot  meet  its  own  expenses  in  the  notes.  All  of  these 
evils  were  exemplified  to  a  remarkable  degree  in  the  cele- 
brated case  of  the  French  assignats  at  the  time  of  the  great 
Revolution.^ 

1  Walker,  ilTone?/ —  Part  III  on  "  Inconvertible  Notes"  is  excellent,  and 
has  fall  details  of  important  historical  cases.  See  also  Pierson,  Prin- 
ciples, Part  II,  Chap.  I.  In  my  Principles,  Vol.  II,  Book  III,  Chap.  XV, 
the  difficult  question  is  discussed  as  to  whether  the  premium  on  gold  is 
the  exact  measure  of  the  depreciation  of  notes  relatively  to  commodities ; 
in  the  essay  on  "  Causes  of  Movements  in  General  Prices"  in  Money  and 
Monetary  Problems,  the  different  effects  of  depreciation  on  foreign  trade 
are  considered  ;  see  also  Bankers^  Money,  Chap.  IL 


CHAPTER  VIII 

CREDIT   AND   GENERAL  PRICES 

1.  Credit  and  the  Quantity  Theory  of  Money.  —  The 
quantity  theory  was  stated,  to  begin  with,  under  various 
conditions,  and  intei'  alia,  it  was  assumed  that  there  were  no 
credit  transactions.  When  we  refer,  however,  to  the  con- 
ditions of  modern  industry,  we  are  at  once  struck  by  the 
fact  that,  in  the  most  advanced  nations,  the  great  mass  of 
wholesale  transactions  and  a  large  part  of  all  monetary 
dealings  are  effected  by  forms  of  credit,  and  not  by  metal- 
lic money.  The  "  clearings  "  of  London  banks  now  amount 
to  nearly  ten  thousand  million  pounds  per  annum,  and  these 
represent  only  part  of  the  banking  transactions  of  the 
United  Kingdom.  In  recent  years  there  has  been  a  great 
extension  of  banking,  both  as  regards  the  opening  of  new 
branches  and  the  acceptance  of  small  accounts,  involving 
the  substitution  of  small  cheques  for  metallic  money  in 
more  and  more  transactions.  The  question  then  arises: 
Is  there  any  connection  at  present  between  the  amount 
of  metallic  money  and  the  general  level  of  prices?  Or, 
in  other  words,  must  we  include,  under  the  quantity  of 
money,  all  these  forms  of  representative  money  and  credit 
instruments  of  various  kinds  which  are  so  much  used  as 
actual  media  of  exchange  ? 

The  answer  to  these  questions  involves  some  of  the 
most     difficult     points    in     monetary    theory,    many    of 

278 


CREDIT  AND  GENERAL  PRICES  279 

which  have  been  the  subject  of  controversy  from  the 
time  of  John  Law  (1671-1729),  whose  ideas  on  credit 
involved  France  in  the  greatest  speculative  mania  on 
record  (1719-1720). 

The  key  to  the  answer  is  in  the  position  that  metallic 
money  —  we  may  now  say  gold  —  is  the  necessary  foun- 
dation of  this  vast  credit  superstructure,  or,  without  meta- 
phor, that  gold  imposes  real  limits  on  the  inflation  of 
prices  through  the  influence  of  credit.  Omitting  other 
points  of  controversy,  the  object  of  the  present  chapter 
is  to  give  an  explanation  of  this  central  truth,  which,  in 
some  form  or  other,  is  generally  accepted.  As  so  often 
happens  in  economic  reasoning,  it  is  necessary  to  antici- 
pate to  some  extent  principles  that  are  developed  at  a 
later  stage,  —  in  this  instance  the  fundamental  principles 
of  banking. 

2.  Gold  Reserves  as  a  Limit  to  Credit  Prices.  —  The  gold 
reserves  of  a  national  banking  system  may  be  limited  and 
economised  to  a  wonderful  degree,  as  is  shown  especially 
in  the  United  Kingdom,  in  which  the  ultimate  gold  re- 
serve is  held  by  the  Bank  of  England. 

But,  in  spite  of  all  economies,  a  certain  amount  of  re- 
serve is  absolutely  necessary  for  two  purposes  —  first,  to 
meet  a  -possible  foreign  drain.  Suppose  that,  with  an  in- 
flation of  credit  and  speculation,  there  is  a  general  rise  in 
prices.  A  stimulus  is  given  to  imports,  and  so  far  there 
is  also  a  check  to  exports,  with  the  result  that  eventually 
there  is  an  adverse  trade  balance  that  must  be  met  by  the 
export  of  gold.  Tlie  pressure  on  the  reserve  of  the  bank- 
ing system  leads  to  a  check  to  advances,  and  thus  to  a 
contraction  of   credit,  and   prices   fall.     As   will   appear 


280  ELEMEN'TS  OF  POLITICAL  ECOXOMT 

later,  a  fc  reign  drain  maj  arise  from  very  different 
causes;  but  the  cause  just  noticed  is  a  real  cause,  as 
13  shown  in  the  history  of  commercial  crises. 

Though  not  so  striking  iu  its  immediate  effects,  the 
influence  of  an  internal  drain  is  equally  real  in  imposing 
limits  to  a  rise  of  prices  through  an  expansion  of  credit. 
Wholesale  transactions,  it  is  true,  are  for  the  most  part 
effected  by  credit  documents,  e.g.  cheques  or  bills  of  ex- 
change ;  and,  as  already  observed,  the  cheque  system  has 
been  extended  to  smaller  and  smaller  transactions  in  re- 
cent years.  At  the  same  time,  however,  there  is  in  every 
country  a  great  mass  of  dealings  which  require  either 
metallic  money  or  some  simple  form  of  legal  tender, 
such  as  bank-notes.  But — to  anticipate  once  more  the 
principles  of  banking  —  every  developed  industrial  coun- 
try has  foimd  it  desirable  to  place  the  issues  of  bank- 
notes under  stringent  limitations.  The  general  effect  of 
these  regulations  is  that  a  very  large  reserve,  in  propor- 
tion to  the  reserve  against  other  liabilities,  is  kept  against 
the  issues  of  notes.  Accordingly  bank-notes  can  only 
take  the  place  of  gold  to  a  very  limited  extent.  Thus 
the  aggregate  amount  of  legal  tender  is  small,  whilst 
cash  transactions,  for  which  even  cheques  payable  on 
demand  are  not  accepted,  are  a  necessary  part  of  the 
economic  system,  e.g.  the  payment  of  wages,  railway 
fares,  and  purchases  on  retail  trade.  If,  then,  there  is 
an  inflation  of  prices  through  an  expansion  of  trade  and 
speculation,  there  is  a  greater  demand  for  legal  tender; 
wages  rise,  and  more  money  is  spent  on  railway  fares 
and  the  like,  and  in  retail  trade.  Thus,  in  the  last  re- 
sort, there  is  an  internal  drain  on  the  ultimate  banking 


CREDIT  AXD   GENERAL  PRICES  281 

reserve ;  and,  as  before,  advances  are  checked  and  prices 
faU. 

Apart  from  both  of  these  possible  drains,  we  may  see 
the  reality  of  the  metallic  basis  in  another  way.  The 
price  of  gold  is  fixed  by  law.  Accordingly  if  prices,  and 
with  prices  money  incomes,  can  rise  indefinitely  through 
the  expansion  of  credit,  whilst  the  price  of  gold  remains 
fixed,  there  will  be  a  great  extension  in  the  demand  for 
gold  watches,  plate  ornaments,  etc.,  which  can  only  be 
met  either  from  the  currency  or  the  reserves  of  the  banks. 
In  a  short  time  all  the  gold  of  the  country  would  be  used 
in  this  way  if  money  incomes  continued  to  rise  :  since  gold 
at  its  fixed  price  might  become  as  cheap  as  silver  or  copper 
which  are  subject  to  the  general  inflation.  Such  a  suppo- 
sition is  obviously  a  reductio  ad  absurdum^  but  it  shows 
very  clearly  that  this  draiyi  for  direct  consumption,  if  it 
occurred,  would  be  the  most  effective  of  all  drains :  and  it 
must  occur  if  there  were  no  real  limit  imposed  by  gold  upon 
the  expansion  of  credit  prices,  and  thus  of  money  incomes. 

3.  The  Limits  imposed  by  Foreign  Trade.  —  The  limits 
imposed  by  the  possibility  of  a  foreign  drain  have  been 
noticed  in  the  last  section.  The  influence  of  foreign 
trade  may,  however,  be  treated  from  a  different  standpoint. 
Relative  prices  must  be  adjusted  to  relative  values.  (See 
above,  Chap.  I.)  This  principle  applies,  not  only  to  any 
one  country,  but  to  what  may  be  termed  a  system  of  coun- 
tries connected  by  commercial  relations.  After  allowing 
for  5?//Ts/-permanent  and  special  causes  of  difference,  e.g. 
protective  duties  and  cost  of  transport,  the  level  of  prices 
in  any  one  country  cannot  remain  above  the  general  level 
of  the  other  countries  connected  with  it  bv  commerce. 


282  ELEMENTS   OF   POLITICAL  ECONOMY 

The  truth  of  this  interconnection  or  sympathy  of  prices 
is  seen  at  once  in  the  case  of  any  of  the  great  staples  of 
international  trade,  e.g.  wheat,  cotton,  etc.  After  allow- 
ing for  cost  of  transport  and  the  like,  the  prices  tend  to 
equality  in  all  the  great  markets.  But  the  same  thing 
is  true  of  all  commodities  that  can  be  readily  bought  and 
sold  and  of  which  the  cost  of  transport  is  not  very  great. 
Any  difference  of  price  stimulates  foreign  trade  —  in  fact, 
this  is  the  proximate  cause  of  all  foreign  trade. 

But  this  same  principle  of  the  adjustment  of  prices  to 
values  shows  that,  if  any  large  group  of  things  is  subject 
to  (say)  a  fall  in  price,  then  other  things  will  fall  in  sym- 
pathy. Thus  a  fall  in  agricultural  products,  e.g.  wheat, 
induces  a  fall  in  farmers'  profits  and  rents,  and  contracts 
the  demands  of  the  agricultural  interests  for  other  things. 
Again,  a  fall  in  wheat  or  wool  affects  directly  the  various 
substitutes,  and  so  on  through  the  whole  range  of  com- 
modities there  is  a  sympathetic  action,  and  thus  even 
things  that  are  incapable  of  transport,  such  as  lands  and 
houses,  may  fall  in  price  through  the  effects  of  foreign 
trade. 

By  these  and  similar  reasonings  it  may  be  established 
that  the  price  level  in  any  one  country  is  a  function  of 
the  general  level  of  tlie  commercial  world. 

4.  Conclusion  of  the  Quantity  Theory  of  Money.  —  We 
now  reach  a  very  general  conclusion  as  regards  the  quan- 
tity theory  of  money  and  general  prices,  viz.,  a  relative 
scarcity  of  gold,  in  a  system  of  gold-using  countries  com- 
mercially connected,  that  is  to  say  a  short  supply  relative 
to  the  work  to  be  done  by  the  gold,  must  make  itself  felt 
in  some  part  of  these  countries.     Broadly,  there  are  two 


CREDIT   AXD   GENERAL  PRICES  283 

principal  methods.  The  scarcity  may  affect  the  ultimate 
banking  reserves  at  the  centres  of  commerce,  in  which  case 
it  will  contract  credit  transactions ;  or  it  may  affect 
directly  the  circulating  medium  in  the  countries  in  which 
credit  is  little  developed,  e.g.  new  countries  that  produce 
raw  material.  But  in  either  case  there  will  be  an  inter- 
action of  prices,  and  the  fall  that  begins  in  one  country 
will  affect  other  countries,  or  must  be  counteracted  in  the 
country  concerned.  If  the  fall  were  due  to  the  contraction 
of  currency  in  the  undeveloped  countries,  there  might  be 
an  apparent  glut  of  money  at  the  banking  centres,  due  to 
the  sympathetic  fall  in  prices  and  consequent  depression 
of  trade.  Such  appears  to  have  been  the  course  of  events,  to 
some  extent  at  least,  in  the  general  fall  in  prices  that 
occurred  after  1875.  There  may  be  a  temporary  and  local 
scarcity  or  glut  of  gold,  but,  on  the  whole,  the  value  of 
gold  must  he  so  adjusted  that  the  demand  and  supply  are 
equated.,  or  there  is  just  enough  to  support  the  general 
level  of  prices.^ 

1  On  the  influence  of  gold  reserves  see  Bagehot,  Lombard  Street  ;  for 
the  development  of  the  argument  on  the  interaction  of  price  levels  see 
Money  and  Monetary  Problems,  Chaps.  VI-VIII,  and  the  essay  on 
"Causes  of  Movements  in  General  Prices,"  ibid.,  p.  342  (4th  ed.).  The 
argument  on  the  interaction  of  gold  and  silver  prices  (here  omitted  as 
too  controversial)  is  treated  in  the  same  essay,  and  in  Frinciples,  Book 
III,  Chap.  XVII. 


CHAPTER  IX 

BIMETALLISM 

1.  Meaning  of  Bimetallism.  —  Bimetallism,  as  usually 
understood,  imj)lies  that  gold  and  silver  are  both  legal 
tender  to  an}^  extent  at  the  option  of  the  debtor,  and  that 
both  are  coined  to  an  unlimited  extent  under  the  same 
conditions.  Free  coinage  does  not  imply  that  there  is  no 
seigniorage  (or  charge  for  mintage),  but  simply  that  there 
is  no  limitation  of  the  quantity  coined  of  either  metal. 
By  way  of  contrast,  it  may  be  noticed  that  the  silver  coins 
of  England  are  limited  in  both  respects.  In  some  coun- 
tries at  present  both  metals  are  full  legal  tender,  but  only 
gold  is  coined  freely.  This  system  is  called  the  limping 
standard  (^etalon  hoiteux).  Bimetallism  also  implies  that 
government  fixes  the  legal  ratio  of  exchange  of  the  gold 
and  silver  coins  (fixed  ratio  bimetallism  is  thus  different 
from  parallel  standards).  Other  forms  of  bimetallism 
are  sometimes  proposed,  e.g.  that  notes  should  be  issued 
against  an  amalgam  (so  to  speak)  of  gold  and  silver ;  that 
is,  the  notes  would  represent  so  much  gold  and  silver,  — 
literally,  a  joint  standard. 

2.  Instability  of  Bimetallism  in  One  Country.  —  It  is 
easy  to  show  by  theory  and  to  confirm  by  experience  the 
instability  of  bimetallism  if  adopted  by  one  country  only. 
The  relative  values  of  gold  and  silver  in  the  commercial 
world  will  be  determined  by  a  variety  of  causes  affecting  the 

284 


BIMETALLISM  285 

demand  and  the  supply.  Suppose,  then,  that  in  the  bullion 
market  the  commercial  ratio  of  exchange  of  the  two  metals 
becomes  different  from  the  legal  ratio,  so  that,  for  example, 
a  parcel  of  gold  coins  would  obtain  in  the  bullion  market 
more  silver  than  is  contained  in  the  same  nominal  value 
of  silver  coins.  Any  one  with  gold  coins  could  melt  them 
down,  sell  them  for  silver  bullion,  get  this  silver  coined  at 
the  open  mints,  and  make  a  profit.  No  one  would  meet 
monetary  obligations  in  gold  at  the  legal  ratio,  and  either 
gold  would  be  driven  from  circulation  (Gresham's  law)  or 
there  would  arise  a  premium  on  gold ;  which  means  that 
the  ratio  has  broken  down  and  that  bimetallism  has 
degenerated  into  a  system  of  parallel  standards.  It  is 
found  on  the  appeal  to  history  that  a  very  slight  difference 
between  the  legal  and  the  market  ratio,  if  the  mints  are 
open  to  both  metals,  is  sufficient  to  drive  the  undervalued 
metal  from  circulation  or  to  put  it  to  a  premium.  Thus 
the  overvaluation  of  gold  to  a  very  small  degree  (about 
one  and  a  half  per  cent)  by  Sir  Isaac  Newton,  when 
Master  of  the  Mint  in  1717,  eventually  led  to  the  single 
gold  standard,  the  silver  being  displaced.  Accordingly, 
it  is  said  that  as  regards  any  single  country  bimetallism 
really  means  an  alternating  standard,  the  effective  standard 
being  always  that  which  is  cheaper  in  commerce  or  over- 
valued as  coin. 

3.  International  Bimetallism.  —  It  is  maintained,  how- 
ever, that  although  any  one  country  might  not  be  able  to 
maintain  a  bimetallic  system,  a  combination  of  all  the 
great  commercial  countries  might  do  so  —  that  is,  keep 
both  metals  in  circulation  at  a  fixed  ratio.  The  condi- 
tions implied  in  international  bimetallism  are  the  same 


286  ELEMENTS  OF  POLITICAL  ECONOMY 

as  before,  in  the  case  of  one  country,  in  respect  of  open 
mints  and  full  legal  tender  at  a  fixed  ratio  ;  and  the  only 
difference  of  importance  is  that  every  nation  concerned 
keeps  its  own  system  of  coivis :  all  that  is  requisite  is  that 
one  coin  at  least  of  each  metal  should  be  of  full  value 
according  to  the  ratio ;  the  smaller  silver  coins  might  still 
be  token  coins.  Thus  international  bimetallism  is  quite 
different  from  international  coinage.  The  latter  system 
involves  difficulties  (e.g.  as  in  the  Latin  Union)  as  regards 
the  wear  and  tear  of  the  coins  and  the  profits  on  token 
coins,  that  would  not  be  found  on  the  system  proposed. 

The  question  now  to  be  answered  is:  why  should  a 
number  of  nations  succeed  where  one  must  fail?  And 
the  answer  is  that  over  a  wide  area  there  is  a  compensa- 
tory action  of  the  double  standard.  The  argument  is  best 
presented  by  the  aid  of  a  numerical  illustration.  Assume, 
then,  for  the  sake  of  definiteness,  that,  instead  of  the 
closure  of  the  principal  mints  to  the  free  coinage  of  silver, 
after  the  adoption  of  the  gold  standard  by  Germany  in 
1873,  all  the  great  commercial  countries  had  adopted  a 
system  of  international  bimetallism  on  the  lines  laid  down 
above,  at  the  ratio  which  for  seventy  years  had  been  re- 
garded as  normal,  namely,  15^  to  1.  Could  this  ratio  have 
been  maintained  ? 

The  objection  we  have  to  meet  is  that  silver  would  have 
fallen  in  value  relatively  to  gold,  and  that  gold  would 
have  been  driven  from  circulation.  Let  it  be  assumed 
that  at  the  time  the  amount  of  gold  and  silver  in  use  for 
monetary  purposes  was  in  each  case  ^500,000,000,  and 
that  whilst  the  production  of  gold  remained  at  about 
£20,000,000,  that  of  silver  rose  to  X60,000,000  per  annum. 


BIMETALLISM  287 

Suppose  that  the  use  of  gold  for  other  purposes  absorbed 
£15,000,000,  thus  leaving  only  £5,000,000  of  the  new 
gold  for  monetary  purposes,  whilst  of  the  new  silver 
£40,000,000  was  available  for  money. 

Under  these  conditions  let  the  market  price  of  silver,  if 
possible,  fall  below  that  which  accords  with  the  legal 
ratio.  Then,  gold  as  bullion  will  obtain  more  silver  than 
the  corresponding  amount  of  silver  coins  at  the  legal 
ratio ;  and  naturally  no  gold  will  be  used  at  the  nominal 
value  for  coins,  and  no  new  gold  will  be  minted.  The 
melting  of  gold  coins  and  the  cessation  of  gold  coinage 
will  go  on  so  long  as  any  divergence  exists  between  the 
market  and  the  legal  ratios. 

According  to  the  figures  taken  all  the  gold  would  be 
driven  from  circulation  in  about  fourteen  years,  that  is, 
supposing  all  the  available  silver  is  devoted  to  the  pur- 
pose. So  far,  then,  it  seems  as  if  the  ratio  could  not  have 
been  maintained. 

But  a  point  of  vital  consideration  remains :  What  is  to 
become  of  all  this  gold  as  it  is  displaced?  According  to 
the  figures  taken,  about  fifteen  millions  of  new  gold  was 
used  for  industrial  purposes,  export  to  the  East,  etc. 
But  if  to  this  annual  supply  there  is  added  annually  some 
thirty-five  millions  of  gold  displaced  from  the  currency 
by  silver,  this  enormous  increase  in  gold  must  lower  its  rela- 
tive value  as  a  commodity ;  and  the  fall  in  the  relative 
value  of  gold  will  involve  in  the  end  a  return  to  the  legal 
ratio. 

This  reasoning  is  confirmed  if  we  now  look  at  silver. 
Under  these  same  conditions  there  is  an  exceptional 
demand   for  silver   to  displace  the  gold,  and  thus  silver 


288  ELEMENTS   OF   POLITICAL   ECONOMY 

tends  to  rise  in  value.  The  conclusion,  then,  is  that  if 
there  is  any  divergence  from  the  legal  ratio  (say,  a  depre- 
ciation of  silver),  the  increase  in  the  supply  of  gold  dis- 
placed from  the  coinage,  and  the  increase  in  the  demand 
for  silver^  to  take  the  place  of  the  gold  in  the  coinage, 
must  very  soon  restore  the  ratio.  This,  as  indicated,  is 
called  the  compensatory  action  of  the  double  stayidard. 

4.  Difficulties  of  International  Bimetallism. —  The  argu- 
ment of  the  preceding  section  is  generally  admitted  to  be 
sound,  even  by  those  who  object  to  the  proposed  system 
on  other  grounds.  The  principal  practical  objections  to 
the  system  may  be  considered  from  the  point  of  view  of 
the  United  Kingdom,  to  whose  opposition  the  failure 
of  the  proposed  convention  was  mainly  due. 

It  was  said  that  the  change  proposed  was  "tremen- 
dous." To  this  objection  it  was  replied  that  in  effect  the 
system  was  only  a  reversion  to  that  which  was  practically, 
though  only  tacitly,  in  existence  before  1873.  A  suffi- 
cient number  of  countries  up  to  that  time  had  adopted 
bimetallism  to  insure  the  maintenance  of  the  ratio  of 
15|  to  1  with  variations  within  very  narrow  limits  for 
seventy  years.  Even  the  Bank  of  England  was  allowed 
by  the  Act  of  1844  to  keep  part  of  the  reserve  against 
notes  in  silver,  and  gold  and  silver  were  always  linked 
together  in  monetary  arguments  as  the  "precious  metals." 
The  stability  of  the  ratio  survived  through  tremendous 
wars  and  political  revolutions.  It  survived  also  through 
great  changes  in  the  relative  proportions  in  the  produc- 
tion of  the  two  metals,  e.g.  after  1850  it  was  feared  that 
gold  would  be  depreciated,  but  the  fall  in  its  value  rela- 
tively to  silver  was  very  slight. 


BIMETALLISM  289 

Next  it  was  objected  that  the  commercial  supremacy 
of  this  country  was  Largely  due  to  its  gold  standard,  and 
this  no  doubt  was  one  of  the  reasons  which  induced 
Germany  to  adopt  the  gold  standard.  It  was  replied,  how- 
ever, that  the  commercial  supremacy  was  due  to  indus- 
trial causes,  and  that  no  one  mentioned  the  gold  standard, 
even  as  a  contributory  cause,  before  1873,  the  year  of  the 
dislocation  of  the  metals. 

It  was  objected,  also,  that  England  was  a  creditor 
country,  and  that  the  interest  on  its  loans  to  foreign 
states  was  due  in  gold,  and  by  the  proposed  convention 
could  be  paid  in  depreciated  silver.  The  answer  was  that 
so  long  as  the  ratio  was  maintained  there  could  be  no 
depreciation,  and  that  the  interest  would  be  paid  as  before, 
not  actually  in  metal,  but  in  an  excess  of  imports. 

Finally,  it  was  objected  that  there  would  be  a  tacit 
refusal  on  the  part  of  banks  and  financial  houses,  in  the 
light  of  the  actual  depreciation  of  silver  since  1873,  to 
accept  it  as  the  equivalent  of  gold. 

And  this  was  the  objection  wliich  really  proved  fatal 
to  the  scheme.  It  was  generally  admitted  that  the  sys- 
tem could  not  be  even  started  unless  with  the  bona  fide 
and  cordial  approval  of  the  banking  interest;  and  the 
banking  interest  of  the  United  Kingdom  as  a  whole, 
though  there  were  notable  individual  exceptions,  was 
extremely  hostile  to  the  scheme.  It  was  felt  that  in  the 
face  of  such  hostility  even  the  fear  of  the  depreciation  of 
silver  might  suffice  to  give  a  premium  to  gold,  and  that 
the  two  metals  would  be  only  used  with  an  allowance 
for  this  premium,  or  otherwise  that  silver  would  be 
effectively  boycotted.     And  it  must  be  admitted  that  the 


290  ELEMENTS  OF  POLITICAL   ECOXO.AIY 

essence  of  the  compensatory  action  lies  in  the  possibility 
of  using  both  metals  without  hindrance  for  monetary  pur- 
poses at  the  fixed  ratio. 

5.  The  Advantages  claimed  for  International  Bimetallism. 
—  The  first  advantage  claimed  for  the  system,  if  it  could 
have  been  introduced  and  effectively  maintained,  was  that 
it  would  counteract  the  tendency  to  the  appreciation  of 
gold  through  lessened  production.  This  argument  has 
lost  its  force  through  the  enormous  increase  in  recent 
years  of  the  gold  supplies.  If  the  former  rate  of  produc- 
tion only  had  been  maintained,  the  adoption  of  the  gold 
standard  by  so  many  countries  would  no  doubt  have 
caused  serious  difficulties  through  the  "scramble  for 
gold"  (Goschen). 

Next,  it  was  maintained  that,  if  both  metals  were  in  full 
use  at  the  legal  ratio  for  all  kinds  of  payments,  the  great 
banks  of  the  world  could  keep  up  and  manage  their  re- 
serves much  more  easily,  and  the  rates  for  money  would 
be  lower  and  more  uniform.  And  in  support  of  this  view 
it  may  be  said  that  at  present  gold  is  hoarded  in  Europe 
in  useless  masses,  whilst  in  India  there  is  often  great 
monetary  stringency  which  cannot  be  relieved  under  the 
present  system. 

In  the  same  way  it  was  argued  that  bimetallism  would 
facilitate  the  operations  of  the  foreign  exchanges  and 
render  the  fluctuations  much  less  severe.  This  argument 
is  also  quite  valid  and  generally  admitted.  And  it  may 
be  added  that,  so  long  as  about  half  the  commercial  world 
has  a  silver  standard  and  the  other  half  gold,  any  depre- 
ciation of  one  metal,  say  silver,  must  have  serious  effects 
on  the  levels  of  general  prices,  and  thus  cause  a  real  dis- 


BIMETALLISM  291 

turbance  of   contracts  and  introduce  a  new  element  of 
uncertainty  into  commercial  transactions. 

All  these  advantages  claimed  for  bimetallism  were  both 
real  and  considerable,  but  their  force  has  recently  been 
diminished  by  important  changes  in  the  monetary  situa- 
tion. Such  are  the  enormous  increase  in  the  supplies  of 
gold,  and  the  effective  adoption  of  the  gold  standard 
throughout  the  commercial  world.  Under  these  conditions, 
to  revert  to  the  ratio  of  15 1  to  1,  in  the  face  of  a  market 
ratio  of  30  or  40  to  1,  would  not  only  be  impossible  prac- 
tically, but  would  lead  to  such  monetary  disturbances  as 
would  more  than  neutralise  any  possible  advantages ; 
and  there  is  always  the  difficulty  of  agreement  as  to  any 
ratio,  a  difficulty  which  was  never  really  surmounted  even 
in  argument. 

1  Principles,  Vol.  II,  Book  III,  Chap.  XVIII,  and  Vol.  Ill,  Book  IV, 
Chap.  II;  Walker,  International  Bimetallism;  L.Daxwin,  Bimetallism ; 
Nicholson,  Money  and  Monetary  Prohlems.  The  Eeport  of  the  Gold  and 
Silver  Commission  (1888)  gives  a  valuable  summary  of  the  principal  ai-gu- 
ments  for  and  against,  and  a  r^sum^  of  the  chief  facts  of  historical  im- 
portance. The  annual  reports  of  the  United  States  Treasury  give  the 
latest  and  most  reliable  statistics  on  the  production  of  gold  and  silver, 
the  world's  coinage,  etc. 


CHAPTER  X 

BANKS   OF  ISSUE 

1.  Development  of  Banking.  —  The  best  way  to  make 
clear  the  meaning  and  real  importance  of  the  principles  and 
methods  of  banking  is  by  the  application  of  the  historical 
method.  We  then  see  that  what  we  consider  natural  and 
obvious  was  only  attained  by  a  long  series  of  experiments, 
often  punctuated  by  disastrous  failures.  Under  modern 
conditions  it  is  only  in  times  of  panic  and  crisis  that  the 
axioms  of  banking  seem  the  dangerous  paradoxes  that  they 
often  actually  were  in  the  infancy  of  credit  (cf.  John 
Law's  Bank,  1720). 

The  functions  of  banks  may  be  divided  into  two  main 
groups :  the  object  of  the  first  is  to  supplement,  or  it  may 
be  displace  wholly  or  in  part,  the  metallic  currency  by 
the  creation  of  "  representative  money  "  ;  that  of  the  second 
is  to  borrow  and  to  lend  money  —  a  large  part  of  which 
is  also  "representative  money." 

These  two  functions  may  be  illustrated  by  reference  to 
the  Bank  of  England.  By  the  Bank  Charter  Act  of  1844 
that  bank  is  divided  into  two  departments  which  are  quite 
distinct.  The  issue  department  is  under  definite  legal 
rules  —  in  fact,  the  issue  of  notes  may  be  said  in  ordinary 
times  to  be  automatic.  The  banking  department,  on  the 
other  hand,  is  guided  by  the  judgement  of  the  direc- 
tors as  in    the    case  of   any  other  joint  stock  company. 

202 


BANKS  OF  ISSUE  293 

The  Bank  of  England  is  only  a  state  bank  in  the  sense 
that  it  is  the  bank  with  which  the  government  keeps 
its  accounts.  The  issue  department,  however,  may- 
be considered  as  in  effect  a  government  office,  like  the 
mint. 

2.  Origin  and  Uses  of  Bank-notes.  —  Bank-notes  are  a 
form  of  "•  representative  money  "  (Jevons),  and  their  uses 
may  be  connected  both  historically  and  theoretically  with 
the  functions  of  money.  One  of  the  earliest  uses  was  to 
provide  a  better  and  more  convenient  medium  of  exchange 
than  the  actual  metallic  currency.  Coins  became  clipi)ed 
and  worn  and  of  uncertain  value,  but  bank-notes  always 
"  represented  "  a  certain  definite  quantity  of  the  precious 
metals.  This  origin  and  use  of  notes  is  well  illustrated 
in  the  case  of  the  Bank  of  Amsterdam.  (See  Wealth  of 
Nations,  Book  IV,  Chap.  Ill,  Part  I.)  This  bank  was 
founded  in  1G09.  At  that  time  Holland  was  the  greatest 
trading  nation,  and  the  great  towns  of  Holland,  especially 
Amsterdam,  were  full  of  the  moneys  of  all  countries  in 
all  states  of  deterioration.  Accordingly,  there  was  great 
uncertainty  in  the  negotiation  of  foreign  bills.  The 
technical  details  present  some  difficulty,  but  in  effect  it 
was  enacted,  when  the  bank  was  founded,  that  all  foreign 
bills  of  exchange  above  a  certain  sum  were  to  be  met,  not 
in  common  currency,  but  in  an  order  on  this  new  state 
bank.  The  primary  object  of  this  bank  was  to  take  any 
money  offered  to  it,  to  recoin  it,  and  for  the  full  metallic 
value  to  allow  credit  in  its  books.  Accordingly,  every  mer- 
chant with  foreign  dealings  must  either  have  a  sufficient 
amount  of  this  bank  money,  or  else  he  must  buy  it  from 
some  one  who  had  a  credit  at  the  bank,  and  at  first,  as 


294  ELEMENTS   OF   POLITICAL   ECONOMY 

Adam  Smith  says,  for  every  guilder  of  this  bank  money 
there  was  actually  a  guilder  in  the  bank.  Naturally  then, 
the  bank  money  came  to  bear  an  agio,  or  premium,  that  is, 
it  was  worth  a  little  more  than  its  nominal  value  ;  it  was 
secure,  and  did  not  require  testing  like  the  ordinary  im- 
perfect currency;  and  it  could  be  obtained  immediately, 
i.e.  the  merchant  would  not  have  to  wait  for  his  coin  to  be 
converted  into  bank  money  if  he  could  buy  a  credit. 

The  consequence  was  that  all  the  money  taken  to  the 
bank  remained  there  because  the  owner  or  receiver  of 
a  credit  could  always  sell  it  for  a  little  more  than  it  was 
nominally  worth.  These  circulating  credits  were  in 
effect  bank-notes ;  and  they  were  not  only  a  better  medium 
of  exchange,  but  also  a  better  standard  of  value,  than 
the  metallic  currency. 

Early  forms  of  bank-notes  were  also  found  useful  for 
the  remittance  of  values,  and  as  soon  as  their  credit  was 
well  established  they  were  recognised  as  a  much  more 
convenient  form  of  currency  for  this  purpose  than  actual 
coins.  This  is  well  shown  in  the  history  of  Scottish 
banking ;  mainly  on  this  account  the  one-pound  note  in 
early  times  bore  a  slight  premium  in  remote  parts  of  the 
country.  At  present  the  rouble  notes  of  Russia  are  said 
to  be  sometimes  worth  a  little  more  than  the  silver  that 
they  represent. 

In  this  connection  it  may  be  observed  that  the  pro- 
portion of  notes  to  gold  in  the  circulation,  if  gold  is  the 
standard  currency,  and  the  notes  are  strictly  convertible, 
is  determined  solely  hy  the  convenience  of  people.  Thus 
in  Scotland  the  one-pound  note  is  generally  preferred  to 
sovereigns,  and   a   few  years   ago,  when  the   notes  were 


BANKS  OF  ISSUE  295 

seldom  renewed,  the  more  ragged  and  dirty  they  were, 
the  more  readily  were  they  accepted,  apparently  in  this 
case  because  the  possible  danger  of  forgery  was  less. 

Bank-notes  have,  however,  another  use  and  another 
origin.  Merchants  and  private  people  found  it  danger- 
ous to  keep  on  hand  large  stores  of  metallic  money. 
They  were  glad  to  store  their  superfluous  money  in  a 
place  of  safety.  In  London  at  one  time  the  mint  was 
used  for  this  purpose ;  but  in  1640  Charles  I  "  borrowed  " 
the  money,  and  although  it  was  soon  restored,  the  shock 
to  credit  made  the  merchants  seek  another  kind  of  store. 

The  goldsmiths  about  this  time  began  to  receive  money 
on  deposit,  and  for  this  money  to  give  receipts.  These 
receipts  may  be  considered  as  early  forms  of  bank-notes. 
At  first  they  probably  actually  kept  the  money,  as  in  the 
case  of  the  Bank  of  Amsterdam,  but  in  time  they  found 
that  they  could  lend  a  good  deal  of  it  and  yet  meet  all 
possible  demands.  Thus  they  came  to  lend  the  deposits 
on  interest,  and  in  order  to  increase  their  loanable  funds 
they  sometimes  gave  interests  on  their  deposits,  in  which 
case  the  receipts,  or  notes,  bore  interest.  The  first  run  on 
these  earl)^  bankers  was  in  1667,  when  the  Dutch  sailed  up 
the  Thames,  and  the  next  in  1672 ;  when  Charles  II  shut 
up  the  Exchequer  and  would  not  pay  the  interest  on  his 
loans  from  the  goldsmiths,  or  restore  the  principal.  This 
repudiation  caused  such  distress  that  after  a  time  interest 
was  again  paid,  and  eventually  the  principal,  of  over 
£1,250,000,  was  recognised  as  the  origin  of  the  na- 
tional debt. 

The  Bank  of  England  was  founded  in  1694  on  the 
analogy   of   the  finance   banks   of   Italy,   and    especially 


296  ELEMENTS  OF  POLITICAL  ECONOMY 

Genoa.  The  primary  object  was  to  advance  the  capital 
of  the  shareholders  to  the  government  and  to  receive 
interest  in  return.  The  issue  of  notes,  was  so  to  speak, 
accidental  (not  essential  to  the  working  as  in  the  early 
Scottish  banks)  ;  the  notes  bore  interest,  were  payable 
to  order^  not  to  hearer^  and  at  first  were  not  issued  of 
any  denomination  below  <£ 20.  They  were  thus  not  fitted 
to  form  a  part  of  the  actual  currency  like  the  one-pound 
notes  in  Scotland. 

We  may  now  consider  the  principles  that  should  govern 
the  issues  of  bank-notes  in  commercial  countries  under 
modern  conditions,  in  which  their  principal  function  is 
to  form  a  convenient  part  of  the  currenc}^  though  occa- 
sionally, as  will  appear  later,  they  are  of  importance  in 
deposit  banking. 

3,  The  Limitation  of  the  Issues  of  Notes.  —  In  consider- 
ing the  functions  of  bank-notes  as  currency  under  modern 
conditions,  the  first  question  that  arises  is  whether  freedom 
of  issues  should  be  allowed.  In  any  case  the  notes  would  be, 
of  course,  under  certain  legal  rules,  just  as  are  cheques.  But 
the  question  is  whether  the  banks  should  be  left  practically 
as  free,  as  regards  the  issues  of  notes,  as  they  are  in  the 
management  of  their  dej^osits  and  advances.  Or  con- 
versely, ought  the  government  to  undertake  the  control 
and  management,  either  directly,  or  by  imposing  strin- 
gent regulations  on  the  banks  to  which  the  function  is 
delegated  ? 

There  are  several  reasons  in  support  of  governmental 
control.  It  is  the  recognised  duty  of  the  government  to 
take  charge  of  the  currency  according  to  the  old  saying,  the 
jus  monetandi  is  in  the  bones  of  kings.     At  one   time,  as 


BANKS   OF   ISSUE  297 

already  pointed  out,  private  tokens  caused  great  incon- 
venience, and  in  a  sense  bank-notes  may  be  regarded 
as  token  money.  Again,  the  issue  of  the  notes  can  be 
made  a  matter  of  pure  routine,  as  at  present  in  the 
case  of  the  Bank  of  England.  The  state  can  secure  the 
greatest  uniformity  and  thus  give  the  notes  a  wider 
circulation  than  if  they  are  left  to  private  enterprise. 
At  present  in  England  the  notes  of  country  banks  that 
still  by  the  Act  of  1844  retain  the  right  of  issue  have  a 
limited  circulation.  The  state  can  offer  the  greatest 
security  for  convertibility,  both  immediate  and  ultimate. 
The  immediate  security  for  convertibility  is  greater, 
because  the  state  can  hold  a  larger  reserve  ;  it  need  not 
look  for  a  profit  on  the  issues ;  it  need  not  even  look 
to  cover  the  necessary  expenses;  the  issue  of  notes  may 
be  regarded  as  a  public  function  just  as  much  as  the 
provision  of  the  metallic  currency  in  which  the  expenses 
of  management  are  borne  by  the  government.  In  any 
case  the  issues  of  notes  partake  of  the  nature  of  a  monop- 
oly, and  in  general  would  yield  a  profit,  and  it  is  claimed 
that  this  profit  ought  to  accrue  to  the  nation  at  large. 
Finally,  it  may  be  said  that  the  control  of  the  notes  does 
not  under  modern  conditions  check  the  development  of 
banking  in  the  other  functions.  In  the  early  stages  of 
banking  the  right  to  issue  notes  had  important  effects 
on  the  development  of  banking  in  general.  (Contrast 
the  history  of  banking  in  Scotland  and  in  France.  In  the 
former  case  the  right  of  issue  led  to  the  extension  of 
the  branch  system,  which  was  checked  in  the  latter  case 
by  tlie  monopoly  of  the  Bank  of  France.)  Under  present 
conditions  the  right  of  issue  is  of  relatively  small  impor- 


298  ELEMENTS  OF  POLITICAL  ECONOMY 

tance  for  deposit  banking  ;  the  great  English  joint-stock 
banks  have  no  right  of  issue,  and  several  of  the  coun- 
try banks  have  surrendered  their  right. 

The  general  conclusion,  then,  is  that  the  state  under 
modern  conditions  should  control  or  strictly  regulate  the 
note  issues. 

4.  The  Denomination  of  Notes.  —  The  next  question  is : 
should  any  limit  be  placed  on  the  denomination  of  the 
notes  in  respect  of  value  —  that  is,  of  course,  a  lower 
limit?  In  England,  at  present,  no  notes  are  issued  below 
<£5,  whilst  in  Scotland  the  lower  limit  is  £1  (thanks 
to  Sir  Walter  Scott  in  the  guise  of  Malachi  Mala- 
growther).  A  few  years  ago  proposals  were  made  to 
issue  notes  in  England  for  10s.  to  replace  the  half- 
sovereign,  which  by  wear  and  tear  is  an  expensive  coin. 
In  some  countries  inconvertible  notes  have  been  issued 
of  very  low  denominations,  e.g.  dd.  or  4c?.,  these  notes 
occasionally  being  torn  into  halves  and  quarters  for 
small  change  (like  the  old  silver  pennies).  Inconvertible 
notes  are  of  course  on  a  different  footing  from  convertible 
notes,  but  on  the  matter  of  the  limit  of  value  a  reference 
to  their  usage  is  relevant. 

As  already  observed,  if  the  notes  are  really  convertible, 
the  proportion  of  notes  to  coin  in  the  circulation  depends 
simply  on  the  convenience  of  people ;  and  if  it  can  be 
shown  by  experience  or  in  any  other  way  that  people 
would  prefer  notes  to  (say)  silver  coins,  why  should 
they  not  be  allowed  the  option? 

The  objections  to  the  issue  of  very  small  notes:  the 
liability  to  forgery  —  tliey  are  not  so  often  returned  to 
the  banks,  and  people  are  naturally  more  careless.     On 


BANKS  OF  ISSUE  299 

this  point  the  evidence  of  the  inconvertible  notes  is 
important,  and  it  is  well  known  that  in  this  case  the 
small  notes  are  liable  to  forgery  to  a  greater  extent. 
The  expense  of  these  small  notes  is  relatively  great  if 
they  are  convertible.  They  are  also  likely  to  be  held 
mainly  by  the  poorer  classes,  and  in  case  of  a  panic  the 
danger  would  be  greater  and  the  suffering  more  severe. 
All  these  objections,  though  of  historical  interest,  are  of 
minor  importance  to  one  that  still  remains  to  be  noticed. 
It  is  said  that  if  notes  are  allowed  to  be  issued  of  low 
denominations,  there  would  be  greater  danger  of  overissue. 
This  objection  leads  to  the  more  general  question,  which 
is  also  of  importance  as  regards  the  limitation  of  the 
issues  generally;  namely.  If  notes  are  legally  convert- 
ible on  demand  is  overissue  possible?  The  answer  to 
this  question  brings  out  the  opposition  between  the 
two  great  principles  that  have  been  discussed  so  much 
as  regards  the  issues  of  notes,  namely,  the  Currency  and 
the  Banking  principles. 

The  advocates  of  the  banking  principle  maintain  that 
notes  should  be  regarded  simply  as  a  form  of  bankers' 
credit,  and  should  be  placed  under  no  special  regulations. 
The  supporters  of  the  currency  principle,  on  the  other  hand, 
maintain  that  the  notes  are  not  merely  forms  of  credit, 
but  money  or  currency  in  a  special  sense,  and  therefore 
require  special  regulations.  Some  of  the  points  raised 
in  this  controversy  have  been  discussed  in  a  former 
section,  but  the  principal  problem  of  historical  interest, 
and  still  of  practical  importance,  is  as  regards  this  possi- 
hility  of  overissue. 

Overissue  is  plainly  a  relative  term,  and  we  have  to 


300  ELEMENTS  OF  POLITICAL  ECONOMY 

determine  the  proper  correlative.  In  the  first  place,  it 
may  mean  overissue  compared  with  the  reserve ;  the 
contention  is  that,  if  the  notes  are  not  strictly  limited,  an 
insufficient  reserve  will  be  kept.  So  far  as  the  ultiynate 
redemption  is  concerned,  there  is  not  much  to  fear  even 
if  the  issues  are  left  to  the  discretion  of  bankers,  and  it 
might  easily  be  provided  for,  e.g.  by  compelling  the  banks 
to  hold  government  securities  against  their  issues  or  some 
other  form  of  documentary  reserve. 

But  in  the  case  of  bank-notes  such  ultimate  convertibility 
is  not  enough.  Notes  considered  as  part  of  the  currency 
ought  under  any  circumstances  to  be  instantly  convertible. 
In  times  of  crisis  and  panic  what  is  required  is  a  certain 
amount  of  gold  itself,  and  that  immediately ;  suspended  con- 
vertibility is  for  the  time  the  same  thing  as  inconvertibility 
and  may  lead  to  depreciation.  The  history  of  banking 
shows  that  there  is  force  in  this  objection.  Unless  the 
issues  of  notes  are  limited,  the  reserve  may  be  insufficient 
for  iminediate  redemption ;  the  amount  of  gold  may  be 
insufficient  or  the  "  documents  "  may  be  unsaleable. 

In  England  the  Bank  Act  of  1844  has  secured  the 
absolute  convertibility  of  the  notes.  When  the  act  was 
passed  only  £14,000,000  could  be  issued  against  securities, 
and  for  some  years  before  1844,  the  average  circulation 
had  rarely  fallen  below  j£  16,000,000.  For  every  note 
beyond  the  legal  limit  of  £14,000,000,  the  Bank  was 
obliged  to  hold  gold.  The  limit  of  issues  against  securi- 
ties has  been  gradually  raised  by  the  lapsed  issues 
of  other  banks,  and  now  stands  at  £18,750,000  ;  and  as 
there  is  a  total  issue  of  about  £52,000,000  tliere  is  gold  in 
the  issue  department  to  the  extent  of  about  £33,000,000. 


BANKS  OF  ISSUE  301 

There  is  thus  no  question  tliat  so  long  as  the  act  remains 
in  force  gold  will  always  be  obtainable  for  notes.  (Whether 
this  gold  would  be  only  available  against  the  notes  in  the 
case  of  insolvency  is  a  legal  question  that  fortunately  is 
of  purely  theoretical  interest.)  It  is  often  said  that  the 
amount  of  gold  held  by  the  Bank  is  uselessly  large.  It 
may  be  replied,  however,  that  the  saving  of  interest  on 
some  X  30,000,000  is  of  small  national  importance  com- 
pared with  the  absolute  convertibility  of  the  notes.  And 
furthermore,  this  gold  can  be  considered  as  an  ultimate 
reserve  available  for  banking  purposes  in  case  of  need 
(as  when  the  Bank  Act  is  suspended  by  the  govern- 
ment). 

But  by  those  who  designed  this  act,  it  was  intended 
not  simply  or  mainly  to  secure  the  convertibility  of  the 
notes,  which  had  never  been  called  in  question  since  the 
resumption  of  specie  payments,  but  to  prevent  overissue 
in  another  sense.  It  was  maintained  that,  if  the  issues  of 
notes  were  not  limited,  they  might  be  issued  to  such  an 
extent  as  to  cause  an  inflation  of  prices  and  eventually  a 
commercial  crisis. 

This  argument  rested  on  the  assumption  that  bank- 
notes were  currency  in  a  different  way  from  other  forms 
of  bankers'  credit ;  that  overissues  of  notes,  even  if  con- 
vertible, increased  the  quantity  of  money  in  circulation, 
and  thus  by  the  quantity  theory  raised  prices.  The  idea 
that  bank-notes  raise  prices  more  than  any  other  forms  of 
credit  because  they  are  "  money  "  is  undoubtedly  fallacious, 
and  the  act  failed  to  prevent  crises  in  the  way  intended. 
Still,  there  is  a  germ  of  truth  in  the  doctrine.  As  already 
seen,  a  certain  amount  of  legal  tender  in  the  form  of  coin 


302  ELEMENTS  OF  POLITICAL  ECONOMY 

or  notes  is  required  to  effect  certain  transactions,  and  this 
requirement  imposes  one  real  limit  to  the  expansion  of 
prices  by  an  inflation  of  credit ;  or,  in  other  words,  it  pre- 
vents the  inflation  due  to  other  causes  and  effected  by 
other  forms  of  credit  from  attaining  the  height  that 
otherwise  would  be  possible.  It  brings  the  crisis  sooner  to 
a  head  and  thus  mitigates  its  intensity.  Even  before  1844 
it  was  found  that  any  excess  of  issues  of  notes  took  place 
after  a  crisis,  that  is,  to  fill  up  the  place  of  other  forms  of 
credit.  And  under  present  conditions  the  chief  objection 
made  to  the  Act  of  1844  is  that  it  prevents  the  Bank 
of  England  giving  relief  in  times  of  pressure  when  legal 
tender  is  required  in  greater  quantities.  This  point  will 
call  for  special  notice  in  the  chapter  on  deposit  banks. 

In  conclusion  it  may  be  said  that  the  experience  of  all 
nations  has  shown  that  it  is  desirable  to  impose  limits  on 
the  issues  of  notes,  and  that  the  banking  principle  is  not 
a  sufficient  guarantee. 

In  a  valuable  chapter  of  Jevons's  Money  (Chap.  XVIII) 
a  reasoned  summary  is  given  of  the  different  methods  that 
have  been  adopted  by  different  countries  as  regards  the 
issues  of  notes.  The  Imperial  Bank  of  Germany  has 
followed  the  principle  of  the  Bank  of  England,  with  the 
exception  of  adopting  an  elastic  limit  for  issues  in  case  of 
need,  instead  of  making  the  government  of  the  day  respon- 
sible for  the  suspension  of  the  act. 

At  present  the  banking  system  of  the  United  States  is 
in  a  condition  that  is  generally  considered  unsatisfactory 
as  regards  the  issues  of  notes :  one  of  the  difficulties  is 
connected  with  method  of  a  documentaiy  reserve  ;  another 
arises  from  the  want  of  uniformity. 


BANKS  OF  ISSUE  303 

On  the  whole  there  seems  to  be  little  doubt  that  it  is 
best  to  make  notes  conform  automatically,  after  a  certain 
point  is  reached,  to  the  limits  of  expansion  that  would  be 
imposed  by  gold  itself  under  ordinary  conditions.^ 

1  Bagehot,  Lombard  Street  ;  Jevons,  Money  ;  Walker,  Money  ; 
Nicholson,  Money  and  Monetary  Problems,  and  Bankers''  Money  ; 
Clare,  Money  Market  Primer  ;  Dunbar,  Theory  and  History  of  Bank- 
ing ;  Graham,  One  Pound  Note  in  Scotland  ;  Gilbart,  History  of  Bank- 
ing ;  article  "  Banks  "  in  Palgrave's  Dictionary. 


CHAPTER   XI 

BANKS   OF   DEPOSIT   AND   CO]MMERCIAL   CRISES 

1.  Progress  of  Deposit  Banking.  —  Historically  the  issue 
of  notes  often  precedes  the  institution  of  banks  of  deposit 
and  discount,  the  function  of  which  is  to  receive  and  to  lend 
money.  The  principal  theoretical  difficulty  of  deposit 
banking  is  as  to  the  interpretation  of  the  term  money  and 
the  limitations  on  the  creation  of  bank  money.  "  The 
money  market  of  the  United  Kingdom  is  an  institution  of 
great  importance  and  some  complexity.  It  has  gradually 
grown  to  enormous  proportions,  and  now  embraces  a  fund 
almost  equal  in  amount  to  the  sum  of  the  national  debt. 
This  fund  is  lield  by  the  banks,  is  practically  at  call,  and  is 
repayable  hi  gold  ;  and  yet  ninety-five  per  cent  of  it  is  en- 
gaged in  promoting  the  industries  and  the  material  interests 
of  the  country  and  the  world,  and  only  five  per  cent  is 
actually  held  in  coin."  This  sentence,  from  a  paper  by  the 
late  eminent  banker  and  economist.  Dr.  Gairdner,  presents 
in  a  striking  form  the  magnitude  of  representative  money 
under  modern  conditions ;  and  it  must  be  remembered  that 
in  ordinary  times  gold  coin  plays  a  small  part  in  effecting 
the  actual  exchanges  of  commerce.  We  seem  to  have  real- 
ised the  dictum  of  Sir  James  Steuart  —  the  predecessor  of 
Adam  Smith  —  that  almost  any  form  of  wealth  can  be 
melted  down  into  bank  money. 

To  understand  the  progress  of  deposit  banking  we  have 
simply  to  extend  the  ideas  already  applied  in  the  case  of 

304 


BANKS  OF  DEPOSIT   AXD  COMMERCIAL  CRISES     305 

notes,  issued  against  gold  (or  silver),  to  other  forms  of 
representative  money,  issued,  so  to  speak,  against  other 
forms  of  wealth.  The  early  banker,  who  at  first  kept  all  his 
deposits,  soon  found  that  he  could  safely  issue  notes  with- 
out an  actual  reserve  to  the  full  extent  of  his  obligations. 
It  was  but  a  step  farther  when  he  granted  credit  to  be 
drawn  against  by  means  of  cheques,  without  the  interven- 
tion of  notes,  and  only  kept  enough  currency  to  meet  any 
probable  demand. 

The  progress  of  deposit  banking  has  consisted,  on  one 
side,  in  making  the  proportion  of  metal  that  must  be  held 
smaller  and  smaller ;  and  on  the  other  side,  in  the  exten- 
sion of  the  field  of  operations  to  all  the  branches  of  trade  and 
production,  and  more  generally  to  all  finance  operations. 

The  actual  history  of  banking  shows  that  the  principles 
that  should  govern  the  amount  of  reserve,  and  the  kinds 
of  securities  on  which  advances  should  be  made,  were  only 
made  clear  by  a  series  of  costly  experiments;  and  the  best 
explanation  of  the  theory  of  banking  in  this  form  is  its 
history. 

Here  it  must  suffice  to  indicate  the  limits  that  are 
imposed  on  the  creation  of  "  bank  money  "  in  the  shape  of 
credit  other  than  notes. 

2.  Limits  to  the  Creation  of  Bank  Money.  —  It  might 
seem  at  first  sight,  considering  the  enormous  proportion  of 
the  forms  of  credit  to  the  actual  coin  in  the  banking 
system,  that  this  credit  is  capable  of  indefinite  extension. 
It  is  easy  to  show,  however,  that  there  are  very  real  limits. 
Every  one  who  obtains  credit  from  a  bank,  to  draw  against 
by  cheques,  must  give  some  kind  of  security,  which  means 
that  credit  rests  upon  real  foundations. 


806  ELEMENTS  OF  POLITICAL  ECONOMY 

Next  the  bank  charges  interest  on  advances  of  all  kinds ; 
which  means  that  those  who  make  the  demand  must  be 
willing  to  pay  the  interest ;  that  is  to  say,  they  must  be  able 
to  employ  the  money  obtained  at  a  profit  or  to  meet  the 
interest  as  it  arises  from  other  funds. 

Lastly,  when  a  bank  gives  an  extension  of  credit  to  a 
customer,  it  must  be  prepared  to  meet  his  cheques  in  any 
form  the  receivers  require ;  it  may  be  in  the  form  of  coin  to 
pay  wages  or  in  the  form  of  gold  for  remittance  abroad. 
Thus  the  advances  of  a  bank,  and  of  all  the  banks  of  a 
country  together,  must  be  limited  by  the  available  reserves. 
Eventually  the  same  principle  is  involved  as  in  the  case  of 
note  issues.  Just  as  deferred  convertibility  or  ultimate 
solvency  is  not  sufficient  for  notes,  neither  is  it  for  cheques. 
In  many  of  the  most  striking  failures  on  record  the 
banks  have  been  able  ultimately  to  meet  all  their  liabilities, 
but  at  the  time  their  funds  have  been  locked  up  and  not 
available. 

3.  The  Management  of  Banking  Reserves.  —  The  prin- 
ciples that  should  govern  banks  in  the  management  of 
their  banking  reserves  have  been  admirably  brought  out  by 
Bagehot  (Lombard  Street,  Chaps.  XII,  XIII)  with  special 
reference  to  the  Bank  of  England.  Every  banker  must 
consider  the  amount  of  his  liabilities  ;  the  time  when  they 
become  due,  whether  on  demand  or  after  notice ;  the 
iyitensity,  or  (perhaps  it  would  be  better  to  say)  the  con- 
centration or  similarity  of  the  demands,  that  is,  whether  the 
creditors  are  likely  to  be  influenced  by  the  same  or  by 
counteracting  causes  as  regards  withdrawals  and  deposits. 
He  must  consider  how  far  the  demands  are  calculable  ;  and 
finally,  he    must   estimate  what  kind   of  reserve  will   be 


BANKS   OF  DEPOSIT  AND  CO:\EMERCIAL  CRISES     307 

required  to  meet  the  demands.  The  term  reserve  is  an 
elastic  expression  that  varies  according  to  different  circum- 
stances. In  England,  as  Bagehot  so  well  explains,  there  is 
a  07ie  reserve  system,  that  is  to  say,  as  regards  the  ultimate 
reserve  of  gold.  The  Bank  of  England  is  the  bankers' 
bank.  If  any  bank  has  a  balance  with  the  Bank  of  Eng- 
land, that  is  considered  as  the  most  real  part  of  its  reserve. 
But  the  Bank  of  England  itself  does  not  keep  these  so- 
called  reserves,  but  only  what  it  considers  a  necessary  pro- 
portion. Every  bank  has  money  due  to  it  day  after  day,  — 
a  stream  of  money  flowing  in,  —  and  this  may  be  reckoned 
as  sufficient  to  meet  the  normal  stream  flowing  out.  The 
real  reserve  is  held  against  possible  differences,  and  the 
differences  are  generally  met  by  drawing  on  the  Bank  of 
England. 

When  we  consider  the  case  of  the  Bank  of  England  in 
particular,  and  apply  these  general  principles,  at  first  sight 
it  would  appear  that  it  need  keep  only  a  relatively  small 
reserve.  The  principal  customer  of  the  bank  is  the  gov- 
ernment, and  all  the  material  facts  relative  to  the  revenue 
and  expenditure  are  well  known  and  can  be  provided  for. 
Next,  the  payments  made  on  account  of  the  government 
are  often  of  the  kind  most  satisfactory  to  a  banker,  e.g. 
payments  of  dividends  on  the  debt  generally  only  lead  to 
a  transfer  in  the  accounts  —  that  which  is  paid  away  as 
dividends  being  returned  in  the  form  of  bankers'  balances. 
And  next  to  the  government  the  other  banks  are  the 
principal  customers  of  the  bank.  And  in  this  case,  in 
ordinary  times,  the  aggregate  amount  is  not  onl}^  stable, 
but  better  than  stable.  Because  on  the  threatening  of 
any  monetary  difficulty  the  other  banks  wish  to  strengthen 


308  ELEMENTS   OF  POLITICAL   ECONOMY 

their  position,  and  therefore  to  increase  their  balances  with 
the  Bank  of  England. 

And  even  in  times  of  panic,  if  the  panic  were  due  to  an 
internal  drain  on  the  banking  reserves,  the  danger  could 
be  met  by  the  issue  of  more  Bank  of  England  notes.  All 
that  would  be  necessary  is  the  suspension  of  the  Bank 
Charter  Act  by  the  government  of  the  day,  and  already 
three  precedents  have  been  established.  In  fact,  it  may 
be  said  that  in  this  country  we  have  a  constitutional 
elastic  limit  for  the  issue  of  notes.  It  is  to  be  observed 
also  that,  except  on  one  occasion,  the  bank,  although  hav- 
ing the  privilege  of  extra  issues,  did  not  find  it  necessary  to 
use  it,  because  the  mere  announcement  of  the  suspension 
of  the  limits  imposed  on  the  issues  of  notes  was  sufficient  to 
restore  confidence  ;  in  the  worst  crises  the  notes  of  the  Bank 
of  England  have  been  above  suspicion,  at  any  rate  since  the 
resumption  of  specie  payments  after  the  restriction. 

All  these  considerations,  however,  in  favour  of  a  small 
reserve  are  overborne  by  one  important  factor  that  often 
dominates  the  situation,  namely,  a  foreign  drain  may 
arise  in  an  unexpected  way  to  an  unknown  extent.  Bage- 
hot  gives  as  an  illustration  the  payment  of  the  French 
indemnity  after  the  war  with  Germany,  which  was  largely 
made  through  London.  A  more  recent  example  of  the 
same  kind  was  the  payment  of  the  Chinese  indemnity  to 
Japan.  The  point  to  notice  is  that  these  foreign  drains 
may  arise  from  very  different  causes,  and  they  may  be 
sudden  and  unexpected.  The  best  illustration  of  the 
importance  of  the  management  of  the  banking  reserves 
from  this  point  of  view  is  furnished  by  the  history  of  com- 
mercial and  financial  crises. 


BANKS   OF   DEPOSIT   AND   COMMERCIAL   CRISES      309 

4.  Commercial  Crises. — The  term  commercial  crisis  is 
generally  used  in  an  extended  sense  so  as  to  include  crises 
that  are  essentially  monetary  in  their  origin  and  principal 
effects.  "  There  is  said  to  be  a  commercial  crisis  wlien  a 
number  of  merchants  and  traders  at  once  have  or  apprehend 
they  shall  have  a  difficulty  in  meeting  their  engagements  " 
(Mill).  Essentially,  then,  a  commercial  crisis  is  a  break- 
down of  credit,  though  it  may  be  due  ultimately  to  causes 
affecting  the  material  production  of  wealth.  The  causes 
may  be  divided  into  two  great  groups,  first,  those  that  lead 
to  the  inflation  of  credit  and  to  overproduction  or  specu- 
lation ;  and  secondly,  those  that  precipitate  the  collapse. 

In  the  first  group  we  may  notice,  to  begin  with,  the 
effects  of  bona  fide  commercial  causes.  There  may  be  an 
expansion  of  trade  —  beginning  with  one  great  industry 
and  spreading  to  others,  raising  profits  and  wages  with  its 
flowing  stream.  The  increase  of  money  incomes  leads  to 
a  growth  of  the  funds  available  for  investments.  Old 
securities  rise  in  price  and  a  stimulus  is  given  to  the  crea- 
tion of  new.  There  is  a  great  outburst  in  the  promotion 
of  companies;  many  are  unsound  and  most  have  over- 
valued their  chances  of  success.  At  first  the  investors 
may  look  for  a  profit  in  dividends,  but  as  speculation  in- 
creases they  hope  to  make  their  gains  by  a  rise  in  price  of 
the  shares.  Illustrations  might  be  given  from  the  time  of 
John  Law  and  the  Mississippi  scheme,  and  the  South  Sea 
Bubble,  etc.,  early  in  the  eighteenth  century,  down  through 
the  decennial  crises,  so  characteristic  of  the  nineteenth. 

The  predisposing  causes  may,  however,  be  found  in 
more  purely  financial  causes,  e.g.  the  undue  extension  of 
banking,  especially  when  notes  were  not  properly   regu- 


310  ELEMENTS  OF  POLITICAL  ECONOMY 

lated;  the  mismanagement  of  loans  and  of  reserves;  the 
after  effects  of  great  gold  discoveries,  or  of  the  unlocking 
of  hoards.  After  the  lapse  of  a  certain  time  the  effects  of 
former  crises  seem  to  be  forgotten,  and  this  is  probably  one 
of  the  chief  causes  of  the  periodicity  of  commercial  crises. 

Amongst  the  second  group  of  causes  that  lead  to  the  actual 
collapse  are  to  be  noticed  any  events  that  give  a  sudden 
shock  to  credit,  e.g.  the  outbreak  of  war,  political  revolu- 
tions, repudiation  on  the  part  of  a  foreign  state,  the  failure 
of  any  firm  of  good  standing  and  with  extended  connections, 
and  anything  that  affects  the  ultimate  reserve,  especially  a 
foreign  drain.  A  drain  may  arise  from  many  different 
causes,  e.g.  advances  of  loans  to  foreign  states ;  an  adverse 
trade  balance  —  which  may  be  due  to  excessive  imports 
through  speculative  causes,  or  to  a  bad  harvest  (of  impor- 
tance in  former  times)  ;  or  there  may  be  a  deficiency  of  ex- 
ports, owing  to  the  too  rapid  conversion  of  circulating  into 
fixed  capital.  All  of  these  influences  maybe  illustrated  in  de- 
tail from  the  commercial  history  of  the  nineteenth  century. 

And  it  seems  probable,  in  spite  of  the  improvements  in 
the  methods  of  banking  and  in  the  organisation  of  industry, 
that  these  causes  will  continue  to  operate.  There  is  always 
the  possibility  of  gigantic  fraud  or  culpable  ignorance,  and 
the  increasing  delicacy  of  the  industrial  organisation  in- 
volves new  dangers.  1 

1  See  Pnnciples,  Book  III,  Chap.  XXI ;  Bankers^  Money,  Chap.  IV ; 
Mill,  Principles,  Book  III,  Chap.  XII.  The  earlier  crises  are  fully  de- 
scribed in  the  great  work  on  the  History  of  Prices  by  Tooke  and  New- 
march.  The  annual  "  Commercial  Review  "  of  the  Economist  and  that  of  the 
Statistical  Journal  are  excellent  sources  of  reference  for  the  later  history. 
Palgrave's  Bank  Bate  and  the  Money  Market  brings  Bagehot's  argument 
up  to  date. 


CHAPTER   XII 

THE  EATE   OF  INTEREST  AND   THE   RATE  OF  DISCOUNT 

1.  Interest  on  Capital  and  Interest  on  Money.  —  Some 
account  has  already  been  given  of  interest  as  a  constituent 
element  of  profits,  and  indirectly  of  loan-interest  in  its 
relations  to  profit-interest.  In  tliis  chapter  it  is  intended 
to  give  some  account  of  the  causes  that  determine  the  rate 
of  interest.  Interest  for  this  purpose  may  be  defined  as  the 
price  paid  for  the  use  of  loanable  capital  for  a  time,  the  capi- 
tal borrowed  or  its  equivalent  being  returned  at  the  end  of 
the  time.  In  modern  times  the  capital  is  in  the  first  place 
generally  advanced  in  the  form  of  money,  and  the  same 
money  value  is  returned;  but  it  is  convenient  to  distinguish 
between  the  case  in  which  the  money  is  looked  on  simply 
as  a  means  to  the  acquisition  of  capital  in  the  form  of  other 
things,  and  the  case  in  which  the  money  is  borrowed  defi- 
nitely for  monetary  purposes  — as  for  the  settlement  of  some 
prior  monetary  obligation.  Thus  a  manufacturer  may 
borrow  money  in  order  to  obtain  the  production-capital  to 
extend  his  business,  or  he  may  borrow  money  as  in  a  period 
of  crisis  to  meet  his  bills.  Interest  in  the  first  case  may  be 
called  interest  on  loanable  capital  and  in  the  second 
interest  on  loanable  money.  As  is  usually  the  case,  the 
distinction  is  one  of  the  adjustment  of  emphasis  :  money 
itself  is  a  form  of  capital  and  logically  even  of  production- 
capital,  and  as  already  observed  loans  of  other  forms  of 
capital  generally  are  made  in  terms  of  money.     But  the 

311 


312  ELEMENTS   OF   POLITICAL   ECONOMY 

distinction  drawn  is  one  of  importance  and  is  expressed 
clearly  enough  in  the  terms  employed.  It  is  found  also 
that  interest  in  the  first  case,  namely,  on  loanable  capital 
(as  explained),  is  generally  for  relatively  long  periods, 
whilst  interest  on  money  as  such  is  for  short  periods.  In 
this  latter  case,  to  make  the  distinction  clear,  the  rate  of 
interest  may  be  called  the  rate  of  discount,  from  the 
principal  form  that  it  assumes  in  the  money  market. 
Again,  it  may  be  noticed  that  on  some  theories  all  interest 
is  really  a  form  of  discount  —  the  difference  between  the 
present  and  future  value  of  a  "good " ;  but  at  this  stage  it 
is  not  necessary  to  pass  into  the  metaphysics  of  interest, 
which  always  has  been  and  still  is  the  subject  of  controversy. 

2.  Interest  on  Loanable  Capital.  —  The  interest  on  loan- 
able capital,  being  the  price  paid  for  its  uses,  like  all  other 
prices,  depends  on  demand  and  supply.  Consider  first  the 
causes  affecting  the  supply.  The  supply  of  loanable  capital 
must  vary,  other  things  being  the  same,  with  the  supply  of 
capital  in  general,  and  this  again  depends  on  the  causes 
already  examined  in  the  first  Book.  (See  Book  I,  Chap. 
VIII.)  We  have  next  to  consider  the  causes  that  induce 
people  to  lend  their  capital  rather  than  employ  it  them- 
selves or  keep  it  idle.  Amongst  such  causes  may  be 
enumerated  the  following:  — 

It  may  happen  that  the  owners  cannot  employ  the 
capital  themselves  —  they  have  no  industrial  knowledge 
or  opportunity.  A  large  part  of  the  wealth  that  is  in- 
herited must  be  invested  in  some  form  or  lent  to  others. 
Again,  some  people  can  only  employ  a  certain  amount 
of  their  means  in  their  own  business,  and  they  invest  or 
lend  their  surplus  profits. 


RATE   OF   INTEREST   AND   RATE   OF   DISCOUNT      313 

The  amount  loanable  will  vary  with  facilities  for  in- 
vestment. For  a  long  time  in  England  the  field  for 
investment  was  narrowed  to  mortgages  on  land,  and 
this  contraction  of  the  field  narrowed  the  supply.  The 
savings  of  the  working  classes  have  largely  increased 
since  facilities  for  the  investment  of  small  savings  have 
been  extended. 

As  already  explained,  demand  and  supply  are  correla- 
tive, and  according  to  the  point  of  view  any  factor  may 
be  considered  as  operating  on  demand  or  supply.  The 
extension  of  the  field  for  investment  is  also  an  extension 
of  the  demand.  The  slightest  difference  in  security 
affects  the  supply  of  the  loanable  capital.  First-class 
securities,  even  at  low  rates  of  interest,  may  be  subscribed 
for  many  times  over,  whilst  it  is  not  possible  to  float  a 
loan  involving  a  high  degree  of  risk.  It  may  be  con- 
tended that  we  ought  to  consider  pure  interest  apart 
from  the  insurance  against  risk.  Logically  this  may  be 
admitted,  but  at  the  same  time  it  is  convenient  to  con- 
sider security  as  one  of  the  causes  affecting  the  willing- 
ness of  people  to  lend  their  wealth,  and  to  increase  the 
supply  of  loanable  capital. 

The  supply  of  loanable  capital  depends  partly  on  its 
mohility  or  the  reverse.  It  may  happen  that  a  large 
part  of  capital  is  in  a  highly  specialised  form,  and  can- 
not be  lent  for  general  purposes.  As  a  rule,  loanable 
capital  must  be  lent  in  the  first  instance  in  the  form  of 
money.  Capital  lent  directly  in  other  forms,  the  par- 
ticular things  (with  or  without  an  allowance  for  depre- 
ciation) being  returned,  must  be  considered  as  yielding 
profit-interest   rather   than   loan-interest    as    here   under- 


314  ELEMENTS  OF  POLITICAL  ECONOMY 

stood.  The  rent  of  houses,  for  example,  is  divided  into 
ground  rent  and  building  rent ;  the  former  is  of  the  nature 
of  economic  rent,  and  tlie  latter  is  of  the  nature  of  profit 
on  building.  And  similarly,  in  agricultural  land,  we 
may  distinguish  between  the  economic  rent  and  the 
profit-rent;  and  generally  we  distinguish  between  profit- 
interest  and  loan-interest,  although  there  is  a  connection 
between  the  two  rates.  This  connection  has  already  been 
treated  from  one  point  of  view  (Book  II,  Chap.  VIII) ;  it 
may  now  be  noticed  as  affecting  the  Bupply  of  loanable 
capital.  If  profit-interest  is  relatively  high,  people  are 
more  inclined  to  employ  their  capital  themselves,  and  the 
supply  of  loanable  capital  is  diminished.  Conversely,  as 
the  rate  of  profit  falls,  people  are  more  willing  to  lend. 

In  some  cases  the  influence  of  laiv  and  puhlic  opinion 
is  a  factor  of  importance.  When  interest  in  most  forms 
was  condemned  by  religion  and  morality,  and  subjected 
to  legal  penalties,  there  must  have  been  a  considerable 
effect  on  the  supply  of  loanable  capital.  And  this  con- 
traction of  the  supply  no  doubt  so  far  tended  to  raise 
the  rate  of  interest,  which  was  still  further  raised  by  the 
extra  risk  involved.  These  two  considerations  are  the 
standard  arguments  advanced  against  the  usury  laws. 
On  the  other  hand,  it  may  be  said  that  these  laws  were 
intended  in  effect  to  regulate  the  abuses  of  monopoly, 
and  so  far  they  were  economically  justifiable. 

The  causes  affecting  the  demand  for  loanable  capital 
are  multitudinous  in  detail,  but  may  be  arranged  under 
two  groups.  The  demand  may  be  on  the  part  of  unpro- 
ductive consumers  —  one  of  the  few  cases  in  which  it  is 
useful  to  retain  this  old  distinction.     In  early  times  this 


RATE   OF  INTEREST   AND  RATE   OF   DISCOUNT     315 

form  of  demand  was  of  the  greatest  importance.  People 
borrowed  to  anticipate  revenue  in  order  to  anticipate 
their  consumption.  Estates  were  burdened,  not  to  spend 
the  capital  obtained  in  improvements,  but  in  entertain- 
ments or  in  providing  for  the  expenses  and  risks  of  war. 
Under  present  conditions  this  form  of  demand  is  spe- 
cially illustrated  in  the  case  of  governments.  Most 
national  debts  have  been  incurred  for  purposes  that 
economically  would  be  classed  as  unproductive,  though 
it  may  be,  as  in  war,  for  purposes  of  more  importance 
than  opulence.  The  debts  of  local  governments  are 
ostensibly  for  productive  purposes  to  a  much  greater 
extent,  but  the  term  productive  must  receive  a  wider 
significance  than  is  usually  given  to  it  in  ordinary 
trade. 

The  demand  for  productive  purposes,  as  just  indicated, 
may  be  made  by  governments  (especially  for  municipal 
trading),  but  the  greater  part  under  this  heading  is  for 
industrial  companies  and  private  firms.  The  tendency  in 
modern  times  has  been  more  and  more  for  business  of  all 
kinds  to  be  carried  on  to  a  great  extent  with  borrowed 
capital.  And  this,  indeed,  is  one  of  the  most  potent  causes 
of  the  extension  of  companies,  as  is  shown  by  the  creation 
of  so  many  small  companies.  (See  Book  I,  Chap.  IV.)  A 
glance  over  the  causes  just  enumerated  which  affect  the 
demand  and  the  supply  of  loanable  capital  is  sufficient  to 
show  that  the  rate  of  interest  on  loanable  capital  is  subject 
to  variation,  and  it  is  impossible  to  lay  down  any  general 
proposition  as  regards  the  result  and  movement  in  the  rate 
under  present  conditions. 

In  addition  to  all  the  causes  supposed  to  operate  in  any 


316  ELEMENTS  OF  POLITICAL  ECONOMY 

one  country  we  have  to  take  account  of  international 
influences.  There  is  a  constant  expansion  of  the  field  for 
investment  in  new  and  undeveloped  countries  consequent 
on  the  improvements  in  communication  and  in  security. 
On  the  other  hand,  taking  a  broad  view,  capital  seems  to 
be  increasing  in  old  countries  much  faster  than  labour,  and 
in  consequence  the  share  of  capital  in  the  annual  produce 
so  far  will  tend  to  increase.     (See  Book  IV,  Chap.  IV.) 

3.  Interest  on  Loanable  Money  —  the  Rate  of  Discount. 
—  We  may  now  consider  the  rate  of  interest  for  loanable 
money  as  such,  and  especially  the  "  money  "  of  the  money 
market.  The  need  for  a  special  examination  may  be 
shown  by  an  illustration.  During  the  last  fifty  years,  in 
England,  the  rate  of  interest  on  first-class  securities  of  a 
permanent  character  has  oscillated  within  narrow  limits, 
about  three  per  cent  if  we  take  the  yield  to  consols  on  the 
purchase  price  as  typical ;  whilst  the  minimum  rate  of  the 
Bank  of  England,  to  take  the  typical  example  of  interest 
on  short  loans,  has  varied  between  ten  per  cent  and  two 
per  cent.  It  is  true  that  the  price  of  consols  is  subject  to 
peculiar  influences,  e.g.  the  special  demand  for  trustee  pur- 
poses ;  but  the  difference  between  the  yield  to  consols  and 
that  to  (say)  railway  debentures  or  first-class  mortgages 
has  probably  never  exceeded  one  per  cent,  whilst  the  market 
rate  of  discount  has  diverged  much  more  widely  from  the 
bank  rate. 

The  difference  between  the  rates  on  capital  and  money 
cannot  be  explained  by  a  difference  in  security.  In  both 
cases  the  security  may  be  considered  perfect.  The  Bank 
of  England  does  not  make  advances  except  on  first-class 
security,  and  the  credit  of  the  British  government  is  not 


RATE  OF  INTEREST  AND   RATE  OF   DISCOUNT     317 

indicated  by  the  fluctuations  in  the  price  of  consols.  The 
reason  of  the  difference  in  the  two  rates  is  that  they  de- 
pend on  different  causes. 

We  have  now  to  examine  the  causes  that  affect  the  sup- 
ply of  loanable  money  as  such.  Here,  as  throughout  this 
part  of  the  subject,  the  difficulty  arises  from  the  elasticity 
of  the  term  money ^  not  for  purposes  of  verbal  definition, 
but  for  practical  purposes. 

Consider  the  supply  of  money  that  is  lent  and  borrowed 
in  the  money  market.  In  the  words  of  Mr.  Clare,  cheques 
and  bills  form  the  principal  currency  of  this  country. 
Money  consists  of  a  relatively  small  foundation  of  metallic 
money  and  notes,  and  a  large  mass  of  representative  money, 
or  of  different  forms  of  credit  that  for  various  purposes  are 
accepted  as  money  and  fulfil  the  functions  of  money. 
Money  may  mean  gold  in  the  Bank  of  England  or  a  cash 
credit  in  a  branch  bank  in  some  remote  village  in  Scotland. 
Similarly  the  demand  for  money  is  equally  elastic.  Some- 
times the  demand  may  be  met  by  some  form  of  credit;  some- 
times it  is  a  demand  for  gold,  and  nothing  else  will  suffice. 

The  causes  that  affect  the  demand  and  the  supply  of 
loanable  money  are  so  intimately  connected  that  they  may 
be  taken  together.  The  most  important  cause  affecting 
the  rate  of  discount  or  the  rate  of  interest  on  money  for 
short  periods  is  the  state  of  credit.  Any  sudden  contrac- 
tion of  credit  from  any  cause  at  once  diminishes  the  avail- 
able supply  of  money ;  and  at  the  same  time  also  it  increases 
the  demand.  The  banks  have  less  to  offer  and  their  cus- 
tomers require  more. 

Next  to  the  state  of  credit,  we  may  notice  the  amount  of 
the  ultimate  real  reserve^  in  this   country  the  gold   held 


318  ELEMENTS  OF  POLITICAL  ECONOMY 

by  the  Bank  of  England  for  banking  purposes.  (This 
reserve  is  held  by  the  banking  department  for  the  most 
part  in  the  form  of  notes,  but  these  notes  can  at  once  be 
exchanged  for  gold  in  the  issue  department  if  required.) 
If  the  real  banking  reserve  falls  below  a  certain  point, 
which  of  course  varies  according  to  circumstances,  a  crisis 
is  inevitable  ;  and  the  most  marked  symptom  in  general 
of  a  monetary  crisis  is  a  great  rise  in  the  bank  rate.  It  is 
not  the  absolute  amount  of  the  reserve  that  is  of  impor- 
tance, but  the  proportion  of  reserve  to  liabilities.  This  has 
been  well  shown  by  Mr.  Palgrave  in  his  work  on  the  bank 
rates  of  England,  France,  and  Germany. 

The  amount  of  this  reserve  itself  depends  on  various 
causes,  some  of  which  operate  directly  on  the  bank  rate  as 
well  as  indirectly  by  affecting  the  reserve.  Sometimes  the 
reserve  may  vary  greatly  with  but  little  effect  on  the 
rate,  as  when  the  cause  of  the  withdrawal  is  well  known, 
and  a  reverse  flow  may  be  anticipated.  Thus  the  pay- 
ments of  dividends  by  government  and  the  remittance  of 
gold  to  Scotland  at  the  "  terms  "  may  have  little  effect  on 
the  rate,  because  it  is  expected  that  the  gold  will  soon 
be  returned.  At  the  same  time  these  regular  demands, 
although  for  temporary  purposes,  tend  to  aggravate  the 
effect  if  they  happen  to  coincide  with  withdrawals  of  an 
exceptional  character.  "All  the  normal  movements  of 
the  currency  are  so  well  known  as  to  be  matters  of  news- 
paper notoriety,  and  the  foreknowledge  deprives  them  of 
their  importance.  The  Bank  knows,  for  instance,  that  gold 
will  be  wanted  for  Scotland  at  stated  periods,  and  can 
therefore  provide  beforehand  for  the  withdrawal.  The 
market  also  knows  it,  but,  being  aware  also  that  the  gold 


RATE   OF  INTEREST   AND  RATE  OF  DISCOUNT     319 

is  still  in  the  country  and  will  soon  be  back,  regards  the 
outflow  with  indifference.  The  same  is  true  of  other 
cases,  and  it  may  be  laid  down  as  a  rule  that  the  ordinary 
movements  of  the  currency,  being  foreseen,  are  provided 
for  in  anticipation  and  rarely  have  effect  on  the  bank  rate. 
At  the  same  time,  if  an  outflow  for  home  requirements 
should  happen  to  coincide  with  a  demand  for  export,  the 
effect  of  the  latter  will  be  to  that  extent  aggravated ;  and 
in  this  connection  it  is  worthy  of  remark  that  the  panic  of 
1857  occurred  towards  the  middle  of  November  and  that  of 
1866  towards  the  middle  of  May,  just  the  periods  when  the 
Bank  had  been  weakened  by  the  Scotch  withdrawals." 
(Clare,  Money  Market  Primer.') 

Amongst  the  causes  that  affect  the  amount  of  the  reserve 
and  also  the  rate  directly  is  the  activity  of  trade.  A  rise 
in  the  bank  rate  after  a  long  period  of  low  rates  is  often 
one  of  the  best  signs  of  a  revival  of  trade.  More  currency 
is  required  for  wages,  retail  trade,  etc.  The  course  of  for- 
eign trade  may  have  much  greater  and  more  sudden  effects. 
Any  excess  of  imports  over  exports  not  accounted  for  by 
the  other  elements  of  indebtedness  (see  below,  Chap,  XIV) 
constitutes  an  unfavourable  balance  that  may  have  to  be 
met  by  the  actual  export  of  gold.  An  unfavourable  balance 
of  trade  is  no  measure  or  sign  of  any  disadvantage  to  the 
nation  in  the  way  that  the  mercantilists  supposed,  but 
under  certain  conditions  it  may  be  of  great  importance  to 
the  banking  interest  and  thus  indirectly  to  the  nation.  In 
itself  the  excess  of  imports  is  an  advantage :  the  nation  has 
so  much  to  consume  ;  but  if  the  consequent  stringency  of 
money  causes  a  disorganisation  of  trade  the  advantage  may 
be  more  than  neutralised  in  the  end.     (See  Chap.  XIV.) 


320  ELEMENTS   OF   POLITICAL   ECONOMY 

One  other  point  may  be  noticed  briefly,  to  avoid  any 
misunderstanding.  The  bank  rate  has  been  taken  as  typ- 
ical and  representative  of  the  rate  of  interest  for  loanable 
money  as  such ;  at  times  of  pressure  in  the  London  money 
market  its  influence  may  be  supreme,  but  at  other  times 
there  may  be  considerable  differences  between  the  bank 
rate  and  the  market  rate;  a  matter  of  much  importance 
when  the  Bank  is  trying  to  attract  gold  from  abroad  by 
raising  its  rate.  The  technical  differences  between  dis- 
counts and  interest  on  loans  do  not  require  notice  in  a 
discussion  of  leading  principles. 

4.  Causes  of  Difference  in  the  Rates  for  Long  and  Short 
Periods.  —  In  considering  the  causes  of  the  difference  be- 
tween the  rates  of  interest  for  long  and  short  periods, 
we  may,  as  before,  take  as  typical  the  yield  on  the  pur- 
chase price  of  consols  and  the  minimum  bank  rate  respec- 
tively. 

Suppose  interest  on  investments  is  higher  than  interest 
for  money  as  such.  The  question  is :  why  should  the 
banks  go  on  lending  "  money,"  it  maybe  for  months,  at  two 
per  cent  or  less  whilst  they  could  get  three  or  more  per  cent 
on  perfect  securities  ?  The  answer  is  that  the  banks  can 
only  lock  up  a  certain  amount  of  their  funds  in  these  per- 
manent investments  —  even  consols.  The  difficulty  is  that, 
if  they  had  to  realise  at  all  suddenly,  they  might  lose  more 
on  the  fall  in  price  of  the  stocks  than  they  would  have 
gained  in  the  time  by  the  difference  in  interest.  This 
applies  to  the  best  securities  {e.g.  consols),  and  still  more 
to  those  below  the  first  rank,  in  which  the  yield  of  interest 
is  higher. 

The  low  rates  for  money  may  be  a  sign  of  a  want  of 


RATE   OF   INTEREST   AND   RATE   OF   DISCOUNT      321 

confidence,  as  after  a  crisis  there  is  little  effective  de- 
maud  for  money  as  such  owing  to  the  stagnation  of  trade. 

Consider  now  the  case  when  interest  for  money  is  higher 
than  interest  on  investments  for  long  periods,  e.g.  the 
bank  rate  higher  than  the  yield  to  consols.  Under  these 
conditions  the  supply  of  money  as  such  is  relatively  small, 
and  the  demand  is  relatively  great,  as  in  a  contraction  of 
credit  in  the  development  of  a  crisis.  At  such  times  what 
people  require  is  money  as  such,  and  not  capital  in  other 
forms.  This  consideration  also  explains  why  it  is  that  the 
banks  cannot  increase  the  available  supply. 

At  the  same  time  there  is  a  reciprocal  action  between 
the  two  rates,  the  nature  of  which  is  best  seen  in  ordi- 
nary times  as  distinct  from  times  of  crisis.  If  the  rate 
for  money  is  likely  to  be  low  for  a  long  period,  the  banks, 
as  a  whole,  will  try  to  increase  their  holdings  of  first-class 
securities,  which  give  a  better  yield  in  interest,  and  under 
the  circumstances  offer  the  chance  of  a  rise  in  the  capital 
value.  Conversely,  a  rise  in  the  rate  for  money  stimulates 
the  sale  of  securities.  With  a  fall  in  the  bank  rate  con- 
sols tend  to  rise  in  price,  and  with  a  rise  in  the  bank  rate 
tend  to  fall.  Indirectly,  then,  any  cause  that  affects  the 
ultimate  reserve  may  indirectly  affect  the  rate  of  interest 
on  permanent  investments. 

In  former  times,  when  the  home  harvest  was  of  more 
importance  than  at  present  as  regards  our  food  supplies, 
any  deficiency  in  the  harvest  might  cause  an  adverse  bal- 
ance of  trade,  and  thus  lead  to  a  drain  of  gold  and  a  rise 
in  the  bank  rate ;  and  the  anticipation  of  such  a  rise  might 
indirectly  affect  the  price  of  consols.  Thus  it  was  no  un- 
common thing  in  the  summer  months  to  read  that,  owing 


322  ELEMENTS  OF   POLITICAL  ECONOMY 

to  the  continued  bad  weather,  consols  had  fallen  in  price. 
This  depression  in  consols  was  not  due  to  the  depression 
in  the  spirits  of  dealers  on  the  stock  exchange,  or  to  a 
gloomy  view  of  the  credit  of  the  British  government,  but 
simply  to  a  calculation  as  to  a  probable  movement  of  gold 
and  its  consequences. 

5.  The  Relative  Stability  of  the  Rate  for  Long  Periods.  — 
A  question  closely  allied  to  that  discussed  in  the  last  sec- 
tion is  this :  why  should  the  yield  to  first-class  securities 
(say  consols)  remain  practically  steady  for  long  periods, 
whilst  relatively  there  are  violent  oscillations  in  the 
rates  for  short  loans  of  money?  The  rate  of  interest 
in  the  first  case  is,  no  doubt,  also  subject  to  change, 
but  the  point  is  that  the  changes  are  relatively  slow, 
and  within  narrow  limits. 

The  essence  of  the  answer  seems  to  be  that  all  invest- 
ments that  offer  equal  security,  are  equally  marketable, 
easily  transferred,  and,  generally,  possess  equal  net  ad- 
vantages, must  give  approximately  the  same  yield.  The 
quasi-permanent  differences  mark  differences  of  advan- 
tage. Just  as  in  the  case  of  wages  (other  things  being 
the  same),  the  more  insecure  and  troublesome  the  em- 
ployment, so  much  the  higher  the  pay,  so  also  in  invest- 
ments. On  the  other  hand,  consols  have  always  had 
special  attractions  for  trustees  and  others ;  and  through 
being  specially  named  in  bequests,  so  far  have  a  fancy 
price.  It  is  probable  that  the  extension  recently  of  the 
securities  available  by  law  for  trustees,  and  the  still 
greater  extension  through  the  change  of  habits  or 
opinions  as  regards  the  exceptional  advantages  of  con- 
sols, have  been  the  principal  causes  of  their  recent  fnll 


RATE  OF  INTEREST   AND  RATE  OF   DISCOUNT     323 

relatively  to  other  securities;  that  is,  consols  have  lost 
some  of  their  exceptional  value,  not  on  account  of  the 
war  and  the  discredit  of  the  government,  but  simply  be- 
cause investors,  as  a  class,  have  come  to  give  a  wider 
meaning  to  the  expression  first-class  security.  At  one 
time  mortgages  on  land  had  exceptional  claims  to  public 
esteem,  and  were  supposed  to  be  especially  safe  because 
"the  land  was  always  there." 

Recently,  through  the  whole  range  of  securities,  there 
has  been  an  approximation  to  more  uniform  rates,  —  the 
yield  to  the  first  class  has  risen,  and  that  to  the  lower 
classes  has  fallen  relatively. 

To  return  from  this  digression.  There  is  a  general  rate 
of  interest  on  loanable  capital  (as  there  is  a  general  rate  of 
wages  for  hired  labour),  there  are  differences  in  relative 
rates  on  different  investments,  and  both  are  subject  to 
changes ;  but  the  changes  are  relatively  slow  compared 
to  the  oscillations  that  occur  in  the  rates  for  short  loans. 
It  is  this  tendency  to  equality  that  pervades  the  whole 
mass  of  interest-bearing  securities  that  really  explains  the 
stability.  The  aggregate  of  such  securities  is  enormous, 
as  is  seen  at  once  by  a  glance  through  the  lists  of  the 
stock  exchange.  Any  change  in  the  rate  of  interest 
must  affect  all  equally,  after  allowing  for  the  special 
causes  of  difference.  The  annual  additions  to  the  sup- 
ply of  securities  is  small  compared  to  the  mass  in  exist- 
ence, and  it  is  balanced  more  or  less  by  the  annual  savings 
that  seek  investment.  Thus  the  changes  in  demand  and 
supply  are,  on  the  whole,  not  great,  and  operate  slowly  — 
that  is  to  say,  when  the  comparison  is  made  with  the 
smallness  of    the   funds   of   the    money  market   and   the 


324  ELEMENTS   OF   TOLITICAL   ECONOMY 

violent  oscillations,  both  as  regards  the  demand  and 
the  supply  of  loanable  money.  In  conclusion,  it  may  be 
pointed  out  that,  if  we  take  the  average  of  the  rates  for 
long  and  short  periods  over  an  extended  time,  say  for  fifty 
years,  there  is  not  much  difference. 

6.  The  Exchange  Value  of  Money  and  the  Rate  of  Inter- 
est.—  ]Much  attention  has  been  directed  to  the  discussion 
of  the  connection  between  the  value  of  money  in  the  eco- 
nomic sense  of  exchange  value,  and  its  value  in  the  popular 
sense  of  rate  of  interest.  Perhaps  so  much  attention  would 
not  have  been  found  necessary  if  other  words  had  been 
employed  to  express  the  points  in  dispute.  In  effect,  the 
question  really  amounts  to  this :  What  is  the  connection 
(if  any)  between  a  high  or  low  level  of  prices,  and  a  high 
or  low  level  in  the  rate  of  interest?  Put  in  this  way, 
the  obvious  answer  would  seem  to  be  that  there  is  no 
connection  whatever.  A  survey  of  monetary  history 
would  show  that  the  rate  of  interest  is  sometimes  high 
with  high  prices,  and  sometimes  the  reverse  is  the  case. 
And  a  reference  to  theory  raises  the  presumption  that  a 
change  in  the  measure  of  value  must  affect  equally  all 
prices,  including  the  price  for  the  use  of  loans.  Or  we 
may  apply  the  general  principle  that  relative  prices  must 
be  adjusted  to  relative  values,  and  say  that  the  demand 
and  the  supply  of  loanable  capital  are  so  far  unaffected  by 
any  movement  in  general  prices. 

This  argument  seems  quite  sound,  with  the  proviso  which 
was  found  to  be  necessary  ni  the  general  theory,  namely, 
after  time  has  been  allowed  for  the  readjustment.  In  other 
words,  in  the  period  of  transition  from  one  level  of  prices 
to  another,  there  may  be  an  effect  on  the  rate  of  interest. 


RATE  OF  INTEREST  AND  RATE  OF  DISCOUNT     325 

The  principle  involved  may  be  best  explained  in  the 
case  of  inconvertible  notes,  in  which  we  can  observe  in 
the  most  marked  manner  the  effects  of  changes  in  price 
levels. 

Suppose  the  notes  are  issued  by  the  government  in 
such  a  way  that  prices  are  directly  affected,  as  when  the 
notes  are  scattered  up  and  down  the  country  in  the  pay- 
ment of  governmental  expenses.  All  prices  rise,  and  so 
far  there  is  a  stimulus  to  trade  and  a  demand  for  loans 
from  the  banks.  In  this  case,  however,  there  is  nothing 
in  the  mode  of  issue  to  increase  the  funds  of  the  money 
market,  and  thus  the  rate  of  interest  rises  with  the  rise 
in  prices.  Suppose,  however,  that  the  government  issues 
the  notes  in  the  first  place  to  the  banks,  and  the  banks 
throw  them  into  circulation  by  making  advances ;  in  this 
case  the  rate  of  interest  will  fall,  and  prices  will  still 
rise. 

The  same  principle  may  be  applied  in  the  case  of  great 
gold  discoveries  —  although  here  the  effects  are  not  so 
sharply  defined.  If  the  new  gold  is  thrown  directly  into 
the  channels  of  circulation,  and  raises  prices  and  stimu- 
lates trade,  then  this  increase  in  the  supply  of  gold  will  be 
accompanied  by  a  rise  in  the  rate  of  interest.  If,  on  the 
other  hand,  the  new  gold  is  first  thrown  on  the  loan  mar- 
ket, for  the  time  it  will  lower  the  rate  of  interest  on  money, 
though,  as  before,  prices  will  rise. 

Conversely,  in  the  case  of  a  fall  in  general  prices,  or  an 
appreciation  of  gold,  if  the  fall  of  prices  is  due  to  a  direct 
contraction  of  tlie  currency  in  the  outskirts  of  commerce, 
then  there  may  be  an  apparent  abundance  of  money  in  the 
banks  at  the  great  centres,  and  the  rate  of  interest  may  be 


326  ELEMENTS  OF  POLITICAL  ECONOMY 

low.     If,  on  the  other  hand,  the  scarcity  of  gold  is  first  felt 
at  the  centres,  the  rate  of  interest  will  so  far  rise.^ 

1  Principles^  Book  III,  Chap.  XXII ;  on  the  metaphysics  of  interest, 
and  the  history  of  opinions,  see  the  works  of  Boehm-Bawerk,  translated 
and  edited  by  Smart ;  on  the  money  market,  Bagehot,  Lombard  Street; 
Jevons,  Money;  and  Jevons,  Investigations  in  Currency  and  Finance; 
Clsixe,  3Ioney  Market  Primer;  Nicholson,  Bankers''  Money.,  Chap.  Ill; 
Giffen's  Essays  in  Finance;  Palgrave's  Bank  Bate  and  the  Money 
Market. 


CHAPTER  XIII 

THE  THEORY  OF  FOREIGN  TRADE 

1.  The  Problems  of  Foreign  Trade.  —  The  subject  of 
international  or  foreign  trade  is  one  of  great  complexity. 
It  includes  the  pure  theory,  the  object  of  which  is  to  bring 
out  the  principles  by  the  aid  of  hypotheses  and  the  use  of 
the  abstract  deductive  method ;  it  also  embraces  an  account 
of  the  foreign  exchanges,  than  which  there  can  be  nothing 
more  definite  and  practical ;  it  involves  the  consideration 
of  the  real  advantages  and  possible  disadvantages  of  foreign 
trade  and  the  application  of  the  results  to  the  opposing 
policies  of  free  trade  on  the  one  side,  and  the  various 
forms  of  protection,  preference,  monopoly,  or  the  opposite 
of  free  trade,  by  whatever  name  it  happens  to  be  called  by 
the  fashion  of  the  day.  Each  of  these  branches  of  the 
subject  has  difficulties  of  its  own.  Any  one  who  is  inclined 
to  think  that  the  use  of  hypotheses  and  the  abstract 
method  involves  simply  the  setting  forth  of  a  few  self- 
evident  truths  may  be  invited  to  peruse  Mill's  "stupen- 
dous "  chapter  on  international  values,  and  then  to  com- 
pare the  critique  by  Cournot  with  the  rehabilitation  by 
Professors  Edgeworth  and  Bastable  (who  again  differ  in 
certain  respects).  The  very  object  of  this  pure  theory  is 
to  explain  the  operation  of  the  economic  forces  which 
govern  the  actual  trade  of  the  world;  and  the  use  of  the 
abstract  method  is  not  to  deal  with  imaginary  examples 

327 


328  ELEMENTS  OF  POLITICAL  ECONOMY 

from  an  imaginary  world,  but  to  make  the  principles  of 
this  world  of  ours  as  clear  as  possible  by  abstracting  or 
taking  away  circumstances  that  are  not  essential. 

Such  being  the  complexity  and  difficulty  of  the  subject, 
the  main  object  in  the  present  chapter  will  be  to  set  forth 
what  is  generally  accepted  as  clearly  as  possible,  and  to 
indicate  where  the  by-paths  of  controversy  leave  the  main 
track  without  pursuing  them  very  far.^ 

2.  Meaning  of  Foreign  Trade.  —  International  trade,  as 
the  name  implies,  refers  to  trade  between  different  nations. 
As  in  the  case  of  most  economic  conceptions,  so  in  dis- 
tinguishing between  "  domestic  "  and  "  foreign  "  trade  we 
must  leave  a  debatable  margin.  If  we  compare  two 
"  nations  "  with  two  "  places  "  within  the  same  country, 
the  following  are  the  chief  points  of  contrast :  — 

The  two  nations  are  politically  independent  and  the 
respective  governments  may  impose  various  restrictions 
on  imports  and  exports ;  labour  and  capital  move  with 
comparative  difficulty  between  two  countries  owing  to 
various  causes,  such  as  distance,  differences  in  language, 
religion,  social  customs,  love  of  home,  etc.  ;  the  two 
nations  have  different  monetary  systems,  and  payments 
are  made  for  the  most  part  by  means  of  bills  of  exchange 
founded  on  the  actual  transactions  of  commerce.  These 
differences  are,  it  will  be  seen,  only  differences  of  degree, 
and  it  is  not  necessary  that  all  should  be  present  in  every 
case  to  constitute  foreign  trade.     Stress  is  laid  on  differ- 

1  In  the  treatment  in  my  larger  work,  Vol.  II,  Book  III,  Chaps.  XXIII- 
XXVIII,  a  somewhat  different  order  is  adopted  for  the  reasons  there 
given  ;  and  some  of  the  problems  are  discnssed  in  Hook  V,  Chaps.  XIV, 
XIX,  after  the  treatment  of  the  principles  of  governmental  control  and 
taxation. 


THE   THEORY  OF  FOREIGN   TRADE  329 

eut  elements  in  different  problems ;  in  free  trade  and  pro- 
tection the  political  elements  are  of  importance,  whilst  in 
the  pure  theory  of  foreign  trade  the  comparative  immo- 
bility of  labour  and  capital  is  predominant ;  again,  in  the 
pure  theory  money  is  either  excluded  or  the  same  standard 
is  applied  throughout,  whilst  in  the  foreign  exchanges  a 
large  part  of  the  subject  is  concerned  with  the  exchange  of 
different  moneys. 

3.  The  Pure  Theory  of  Foreign  Trade. — In  the  pure 
theory,  as  just  indicated,  the  chief  point  of  distinction 
between  home  and  foreign  trade  is  in  the  difference  in 
the  relative  mobility  of  the  productive  powers.  We  as- 
sume to  begin  with  that  within  any  country  or  nation  the 
mobility  of  labour  and  capital  is  perfect.  In  other  words, 
capital  and  labour  flow  readily  to  the  districts  in  which 
their  productive  power  is  greatest.  If,  for  example,  owing 
to  natural  or  acquired  advantages,  one  place  with  a  given 
amount  of  labour  and  capital  can  produce  more  than  any 
other  place  in  that  country,  the  industry  will  be  localised 
in  that  favoured  locality.  And  as  we  have  seen  (Book  I, 
Chap.  Ill),  there  is  actually  in  every  country  a  tendency 
to  the  localisation  of  industries,  and  the  hypothesis  of  the 
theory  is  approximately  true. 

A  country  considered  as  isolated  produces  a  great  num- 
ber of  products ;  it  has  a  variety  of  extractive  industries, 
such  as  agriculture,  mining,  fisheries,  etc.,  and  a  variety 
of  manufactures  in  the  broad  sense  of  the  term.  It  is 
assumed  that,  as  the  result  of  competition  and  mobility, 
the  capital  and  labour  will  be  so  distributed  as  to  give 
the  best  return.  The  controlling  force  in  this  distribution 
is  the  tendency  to  equality  of  real  wages  and  real  profits, 


330  ELEMENTS   OF   POLITICAL   ECONOMY 

per  unit  of  productive  power  or  efficiency.  In  comparing 
real  wages  in  different  places  and  employments  in  the 
same  country,  for  the  purpose  of  theory,  we  may  take 
time  as  the  unit  of  measurement  of  the  labour  and  money 
(of  uniform  purchasing  power)  as  the  measure  of  the 
reward.  If  the  labourers  find  that  they  can  obtain  more 
money  for  the  same  number  of  hours  of  labour  in  the 
towns,  they  will  migrate  thither  from  the  country.  Sim- 
ilarly, the  makers  of  goods  in  the  towns  will  flock  to  the 
district  in  which  the  reward  is  highest.  In  the  same  way 
capital  will  be  attracted  to,  or  repelled  from,  certain  trades 
or  places,  according  to  the  profit  to  be  obtained. 

In  the  markets  of  any  one  country  it  is  assumed  that 
the  same  prices  prevail  for  the  same  qualities  of  goods. 
If,  then,  it  should  happen  that,  owing  to  any  reason,  it 
takes  more  labour  and  capital  to  put  goods  on  the  market 
from  some  place,  than  from  others  in  which  the  thing  is 
produced,  the  makers  of  the  thing  in  this  ill-favoured 
place  will  obtain  a  less  reward  than  those  in  the  more 
favoured  localities.  Accordingly,  the  producers  in  the 
first  case  will  shift  their  quarters  if  they  can,  and  it  is 
assumed  that  within  the  borders  of  the  country  concerned, 
this  is  generally  possible. 

But  when  we  constrast  two  "  nations  "  with  districts  in 
the  same  country,  the  essential  difference  for  pure  theory 
is  that  between  foreign  countries  capital  and  labour  will 
not  move  at  all  or  only  with  difficulty. 

This  assumption  of  the  pure  theory  is  also  approxi- 
mately true,  at  any  rate  over  a  relatively  short  period. 
The  natural  resources  are  obviously  attached  to  each 
country,  and  the  mines,  the  cultivated  lands,  the  means 


THE  THEORY  OF   FOREIGN  TRADE  331 

of  communication,  have  large  capitals  sunk  in  them. 
Similarly,  the  buildings,  machinery,  and  most  forms  of 
auxiliary  capital  are  incapable  of  export  once  they  have 
been  specialised.  As  regards  labour,  the  saying  of  Adam 
Smith  is  still  true  of  foreign  trade,  "  Man  is  of  all  bag- 
gage the  most  difficult  to  be  transported." 

Now  it  is  theoretically  possible  that,  owing  to  economic 
conditions,  natural  and  acquired,  one  country  may  possess 
an  absolute  superiority  over  another  in  productive  power 
in  all  its  industries,  or  for  the  present  purpose  it  may  be 
said,  in  all  the  industries  that  yield  commodities  capable 
of  export.  Such,  for  example,  is  the  case  if  we  compare 
a  backward  country  with  one  at  a  much  higher  stage  of 
civilisation. 

But  the  great  staples  of  international  trade  must  sell 
for  the  same  prices  in  the  world's  markets.  Thus  the 
superior  country  for  a  certain  amount  of  exports  will  re- 
ceive a  greater  money  reward  per  unit  of  productive 
power  than  the  inferior  country,  and  the  money  will  buy 
more  real  things.  It  is,  however,  impossible  for  the  inhab- 
itants of  the  inferior  country  to  betake  themselves  and 
their  capital  to  more  favoured  regions ;  they  must  make 
the  best  use  they  can  of  their  powers  within  their  own 
borders  and  accept  a  lower  rate  of  payment  per  unit  of 
productive  power. 

It  is,  however,  possible  that  when  trade  is  opened  with 
the  superior  country,  the  inferior  country  may  gain  by  a 
redistribution  of  its  labour  and  capital,  within  its  own 
borders,  and  the  lower  money  reward  may  command  more 
commodities  than  it  otherwise  would ;  similarly,  also,  the 
superior   country  may  give   even  greater  rewards   to  its 


332  ELEMENTS  OF  POLITICAL  ECONOMY 

producers  through  the  redistribution  of  its  industries, 
after  the  trade  is  established  between  the  two  countries. 
How  these  higher  rewards  are  obtained  is  explained  by 
the  theory  of  comparative  cost. 

4.  The  Theory  of  Comparative  Cost  in  Terms  of  Barter. — 
It  is  usual  to  state  the  theory  of  comparative  cost  in  terms 
of  barter,  at  any  rate  to  begin  with.  The  object  is  to 
bring  out  the  real  advantage  to  be  gained  by  foreign 
trade ;  and  to  do  this  we  must  pass  behind  the  money 
measures.  In  other  parts  of  economics,  as  already  shown, 
it  is  necessary  to  distinguish  between  the  nominal  and  the 
real,  as  in  wages ;  but  as  shown  in  dealing  with  the  rela- 
tion of  cost  of  production  to  value,  it  is  not  necessary 
to  refer  constantly  to  the  ultimate  elements  of  real  cost. 
In  the  same  way  it  may  be  said  of  international  values, 
that  the  theory  might  be  worked  out  in  terms  of  money, 
and  afterwards  interpreted  in  terms  of  real  cost  and  real 
advantage. 

It  is  important  for  the  student  who  may  be  perplexed 
by  the  controversies  on  the  best  method  of  procedure  to 
remember  that  the  same  ground  ought  to  be  covered  in 
the  end,  whether  we  begin  with  barter  or  with  money. 

The  merit  of  the  procedure  by  barter  lies  in  the  em- 
phasis that  is  laid  on  the  fundamental  propositions  that 
all  trade  is  ultimately  barter  and  that  commodities  pay 
for  commodities.  We  thus  get  rid  at  the  outset  of  some 
popular  fallacies  regarding  foreign  trade  which  have 
sometimes  governed  the  policy  of  nations  and  still  in- 
fluence public  opinion.  The  difficulty  of  this  method  lies 
in  the  extremely  hypothetical  character  of  the  conditions 
that  must  be  assumed  and  in  the  transition  from  the  pure 


THE   THEORY   OF  FOREIGN  TRADE  333 

theory  to  the  complexities  of  actual  trade.  This  difficulty, 
however,  is  characteristic  of  the  abstract  method  as  exem- 
plified already  in  the  theory  of  economic  rent  and  the 
quantity  theory  of  money. 

We  may  now  notice  the  conditions  that  are  usually 
assumed  in  this  form  of  the  theory. 

It  is  assumed,  then,  that  there  are  two  countries  only, 
say  A  and  B,  each  producing  the  same  two  commodities 
only  and  both  capable  of  export.  This  assumption  is  not 
so  unreal  as  at  first  sight  may  appear,  if  the  two  com- 
modities are  taken  as  typical  or  representative  of  large 
groups,  e.g.  agriculture  and  manufactures.  It  is  further 
assumed  that  cost  of  carriage  and  other  impediments  to 
trade  in  the  finished  or  exportable  products  may  be  neg- 
lected. This  assumption  seems  more  unreal,  seeing  that 
the  7'aison  d'etre  of  foreign  trade  has  been  stated  to  lie  in 
these  very  impediments.  It  must  be  remembered,  then, 
that  the  impediments  refer  to  the  passage  of  the  productive 
powers  —  the  land,  the  labour,  and  the  capital  —  and  not 
to  the  products.  The  very  idea  of  trade  must  imply  the 
actual  passage  of  the  things,  whatever  the  impediments 
may  be.  If  two  countries  impose  heavy  import  duties,  the 
volume  of  trade  is  checked,  but  it  still  goes  on,  unless 
the  duties  are  prohibitive,  and  an  inquiry  might  be  made 
as  to  the  effects  on  trade  if  the  duties  were  abolished. 
Transport  charges  may  be  compared  to  transport  dues. 

The  units  of  productive  power  are  generally  taken  in 
terms  of  days'  labour.  This  proviso  requires  careful  ex- 
planation. Labour  is  taken  as  representative  of  the  pro- 
ductive power  of  labour  and  capital  combined.  Just 
as  we  assume  that  the  labour  is  applied  under  the  appro- 


334  ELEMENTS  OF  POLITICAL  ECONOMY 

priate  natural  conditions,  so  also  we  assume  that  it  is 
applied  with  the  appropriate  auxiliary  capital.  In  the 
two  countries  considered  these  aids  to  labour  will  differ 
even  if  the  finished  product  is  supposed  to  be  exactly  the 
same.  And  also  the  efficiency  of  the  labour  itself  will  be 
different  or  may  be  assumed  to  be  different.  Thus,  if  the 
natural  conditions  and  the  forms  of  capital  are  the  same 
in  both  countries,  we  may  still  assume  that  the  returns  to 
the  labour  are  different.  That  is  to  say,  a  day's  labour 
in  the  two  countries  means  different  amounts  of  produce. 

Let  it  be  assumed,  then,  that  each  country  can  produce 
both  corn  and  cloth  ;  but  that  A  has  an  absolute  advan- 
tage over  B  in  both  commodities.  The  theory  of  com-para- 
tive  cost  states  that  if  the  advantage  of  A  is  equally  great 
in  respect  of  both  commodities  7io  trade  will  arise,  but  if 
it  has  a  greater  relative  advantage  in  one  thing  it  will 
export  that  thing  and  import  the  other.  In  brief,  the 
trade  arises,  not  because  one  country  can  produce  things 
at  less  real  cost  than  another,  but  because  there  are  differ- 
ences in  the  relative  or  comparative  costs. 

We  might  indeed  go  farther,  and  say  that  in  strictness 
the  absolute  cost  has  nothing  to  do  with  the  trade.  The 
object  of  the  reference  to  absolute  cost  is  simply  to  em- 
phasise the  necessity  of  bringing  in  comparative  cost,  just 
as  the  physicist  may  introduce  the  term  absolute  rest  or 
motion  to  emphasise  the  relativity  that  is  essential  to  these 
ideas. 

These  general  statements  may  be  illustrated  by  numeri- 
cal examples.  Suppose  first,  as  regards  corn,  that  100 
days'  labour  in  A  (with  the  appropriate  and  available 
natural  agents  and  capital)  will  produce  as  much  as  150 


THE  THEORY  OF  FOREIGN  TRADE  335 

days'  labour  in  B  (with  its  aid  from  nature  and  capital). 
Also  as  regards  cloth,  let  100  days'  labour  in  A  produce 
as  much  as  150  in  B.  In  this  case  A  has  a  great  advan- 
tage in  both,  or  the  productive  power  of  its  labour  is  much 
greater.  But  no  trade  will  arise,  because  in  both  respects 
the  advantage  is  the  same. 

But  now  supj)ose,  secondly^  that  in  corn  as  before  100 
days  in  A  will  produce  as  much  as  150  in  B,  but  in  cloth 
100  days  in  A  will  produce  only  as  much  as  120  days  in 
B  (not  150  as  before).  Then  A's  superiority  is  compara- 
tively greater  in  corn  than  in  cloth,  and  a  trade  will  arise; 
A  will  export  corn  to  B,  and  import  cloth  from  B. 

This  may  be  worked  out  in  the  figures  taken  in  the 
following  way  :  — 

If  A  exports  to  B  the  produce  of  100  days'  labour  de- 
voted to  corn,  that  is  an  amount  of  corn  equal  to  the 
produce  of  150  days'  labour  in  B,  and,  therefore,  it  will 
command  the  value  of  150  days'  labour  in  B.  (It  is  assumed 
that  commodities  in  the  respective  countries,  taken  sepa- 
rately, exchange  in  proportion  to  their  labour  costs.)  But 
120  days'  labour  in  B  will  obtain  as  much  cloth  as  A  could 
make  at  home  in  100  days.  Therefore,  if  A,  instead  of 
spending  100  days  in  making  cloth  at  home,  devotes  this 
labour  to  growing  corn  and  exports  this  corn  to  B,  A 
can  obtain  for  it  the  same  amount  of  cloth  which  it 
could  have  produced  at  home  and  in  addition  the  value 
of  30  days  of  B's  labour. 

This  would  be  the  advantage  to  A  of  the  opening  of 
foreign  trade  —  on  the  supposition  that  B  remains  entirely 
passive  and  simply  diverts  some  of  its  labour  from  corn  to 
cloth.     All  the  advan  tage  of  the  trade  will  go  to  A. 


336  ELEMENTS   OF   POLITICAL   ECONOMY 

But  in  the  same  way  we  may  begin  with  B  as  active  and 
A  as  passive.  If  B  exports  to  A  the  product  of  150  days 
in  cloth,  this  will  be  equal  to  an  amount  that  A  could  pro- 
duce in  125  days  (according  to  the  figures  taken  above). 
It  will  therefore  obtain  in  A  the  value  of  125  of  A's 
labour  days.  But  with  100  of  these  days  in  A  as  much 
corn  can  be  grown  as  with  150  in  B.  Accordingly,  at  the 
rate  of  exchange  in  A,  B  will  gain  25  days'  labour  of 
A's  commodities.  Thus  it  will  pay  B  to  turn  its  labour 
from  corn  to  cloth,  and  export  its  cloth  to  A  and  import 
corn  from  A.  Under  this  supposition  all  the  advantage  of 
the  trade  will  go  to  B. 

It  appears,  then,  that  whether  we  consider  A  or  B  to 
begin  the  trade  there  are  reasons  why  a  trade  should  arise. 
But  the  advantage  of  the  trade  so  far  apjDears  to  be  entirely 
on  the  side  of  the  country  which  takes  the  initiative. 
There  is  probably  always  some  advantage  relatively  to  the 
country  that  takes  the  active  part,  but  at  present  this  may 
be  put  aside.  Both  countries  may  be  supposed  to  share 
equally  in  the  activity  of  trade.  They  cannot,  however, 
both  gain  the  whole  advantage,  or,  in  other  words,  the 
advantage  of  the  trade  must  be  distributed.  The  answer 
to  this  problem  is  given  in  the  theory  of  international 
values.     (Cf.  Mill,  Principles,  Book  III,  Chap.  XVIII.) 

5.  The  Theory  of  International  Values.  —  In  my  opinion 
it  is  better  at  this  stage  to  introduce  money  as  a  measure. 
(Cf.  Principles,  Book  III,  Chap.  XXVII.)  It  must  suffice 
to  indicate  the  principles  that  are  applied  in  either  case. 

After  the  trade  is  established  between  the  two  countries, 
the  cloth  and  coin  must  exchange  at  the  same  rates  in 
each.     'J'his  is  obvious  because  cost   of   carriage   is  neg- 


Tin:    TIlKOltY   OF    FOKEKiX   TRADE  387 

lected.  If  the  rate  of  exchange  is  that  formerly  cuiTeiit 
ill  B,  then  A  will  gain  all  the  advantage  (and  conversely 
B  will  gain  all  if  the  rate  is  the  rate  formerly  current  in  A). 
Tlie  adjustment  between  these  two  extremes  will  depend 
on  two  considerations,  one  arising  from  the  conditions  of 
demand,  the  other  from  the  conditions  of  suppli/.  As 
regards  demand,  if  li  is  very  keen  to  obtain  corn,  and  A  is 
not  very  anxious  to  get  cloth,  the  greater  intensity  of 
B's  demand  will  make  it  offer  more  cloth.  Thus  the 
intensity/  of  the  reciprocal  demand  is  one  factor  in  the  deter- 
mination of  the  price.  Again,  the  establishment  of  the 
trade  in  the  way  supposed  assumes  that  in  each  country 
there  is  a  transfer  of  productive  power,  in  A  from  manu- 
factures to  agriculture,  and  in  B  from  corn  to  cloth,  to 
take  the  concrete  form  of  the  same  argument.  But  as 
soon  as  we  pass  from  the  conditions  of  perfect  mobility 
that  are  assumed  to  prevail  in  each  country,  some  induce- 
ment must  be  offered  in  order  that  this  transfer  may  take 
place.  The  advantage  in  the  international  exchange  will 
be  so  far  the  greater  on  the  side  of  the  country  to  which 
the  greater  inducement  must  be  offered  to  have  the  trans- 
fer accomplished. 

This  last  consideration  suggests  also  that  other  elements 
must  be  introduced  as  we  pass  from  the  hypothetical 
conditions  at  first  laid  down  or  tacitly  implied. 

Amongst  these  additional  factors  are  to  be  noticed  :  the 
conditions  of  production  —  whether  the  commodities  can 
be  increased  in  response  to  the  extension  of  the  foreign 
demand  at  the  same,  at  a  less,  or  at  a  greater,  cost.  Thus 
if,  as  usual,  it  is  assumed  that  corn  follows  the  law  of 
diminishing  return,  whilst  cloth  follows  that  of  increasing 


338  ELEMENTS  OF  POLITICAL  ECONOMY 

return,  so  far  the  rate  of  exchange  established  will  be  in 
favour  of  corn. 

Another  element  to  take  account  of  is  the  relative  mag- 
nitude of  the  two  countries  and  the  relative  importance  of 
the  foreign  trade  in  each  to  the  total  trade. 

We  must  also  introduce  the  complexities  due  to  the 
facts  that  foreign  trade  is  a  barter,  not  of  two  things  only, 
but  of  many  things,  that  the  cost  of  carriage  is  never  a 
negligible  factor,  that  more  than  two  countries  must  be 
considered,  and  finally  that  the  productive  forces  cannot  be 
adequately  represented  by  days'  labour  of  a  uniform  char- 
acter in  each  country.  We  have  also  to  take  account  of 
the  causes  that  affect  the  growth  and  the  distribution  of 
capital,  and  the  differences  in  the  efficiency  and  in  the 
reward  of  labour  in  different  employments.  It  is  in  work- 
ing out  the  effects  of  these  complicating  causes  that,  in  my 
opinion,  it  seems  necessary  to  introduce  money.  (Cf. 
Principles,  Book  III,  Cliaps.  XXVII,  XXVIII.) 

6.  Money  in  International  Trade.  —  When  the  trade  is 
established  between  the  two  countries  we  must  suppose 
(omitting  cost  of  carriage)  that  the  prices  of  corn  and 
cloth  are  the  same  in  both  countries.  The  inducement  to 
trade  arises  because  at  these  prices  the  labour  in  each 
country  will  obtain  a  better  reward,  which  may  be  reck- 
oned in  consuming  power  as  regards  both  corn  and  cloth. 
That  is,  we  must  compare  money  wages  and  prices  in  each 
country  under  the  old  conditions  and  the  new. 

The  introduction  of  money  wages  shows  the  importance 
of  considering  the  magnitude  of  the  countries  and  of  the 
foreign  trade,  because  in  any  one  country  the  money 
wages  in  the  trade  that  produces  for  export  must  be  pro- 


THE   THEORY  OF   FOREIGN   TRADE  339 

portioned  to  the  general  rate  of  wages  current  in  that 
country,  having  regard  to  the  special  causes  of  difference. 

The  money  value  of  the  exports  must  equal  that  of  the 
imports,  and  the  relative  prices  of  commodities  must  be 
so  adjusted  that  this  equilibrium  is  effected.  Otherwise 
the  country  with  an  excess  of  imports  must  continuously 
export  money,  and  the  drain  of  money  would  lower  prices 
until  it  paid  to  export  some  commodity,  or  not  to  import 
some  other,  or  at  the  same  time  exports  might  be  increased 
and  imports  diminished.  This  argument  is  of  the  nature 
of  a  reductio  ad  absurdum,  and  shows  rather  why  such  a 
drain  could  not  continue  if  it  arose,  than  why  it  could 
not  arise.  As  explained  in  dealing  with  the  foreign 
exchanges,  an  adverse  balance  may  be  met,  not  merely  by 
the  export  of  gold,  but  by  the  export  of  anything  saleable 
for  gold. 

All  that  we  can  say  as  regards  the  distribution  of  gold, 
considered  as  the  world's  standard  money,  is  that  it  will 
be  so  distributed,  and  the  levels  of  prices  will  be  so  ad- 
justed, that  so  far  there  will  be  no  disturbance  of  relative 
values,  or  in  other  words,  that  the  trade  of  the  world  is 
governed  by  real  causes  which  are  only  measured  in  terms 
of  money.  ^ 

1  The  theoiy  of  foreign  trade  in  terms  of  money  is  worked  out  in 
Principles,  Book  III,  Chap.  XXVII,  Sees.  4  to  11,  and  in  Chap.  XXVIII. 
The  subject  is  too  difficult  and  complex  for  further  compression  than  is 
there  attempted.  Bastable's  Theory  of  International  Trade  is  an  excel- 
lent monograph  on  the  whole  subject,  and  the  critical  student  may  refer 
to  the  papers  by  Professor  Edgeworth,  in  the  Economic  Journal,  Vol.  IV, 
p.  40,  Vol.  VII,  p.  401,  Vol.  IX,  p.  125.  The  appendix  to  Bastable's 
third  edition  (1900)  gives  a  clear  and  impartial  account  of  the  points 
in  dispute. 


CHAPTER   XIV 

THE   FOREIGN    EXCHANGES 

1.  International  Debts.  —  The  term  foreign  exclianges 
refers  to  the  settlement  of  international  debts.  In  the 
analysis  of  international  indebtedness  tlie  first  element  to 
be  considered  is  the  amount  of  the  exports  and  imports. 
As  shown  in  the  last  chapter,  if  there  were  no  other  ele- 
ment in  international  indebtedness,  imports  must  be  paid 
for  by  exports ;  and  this,  indeed,  is  accepted  as  the 
fundamental  axiom  of  foreign  trade. 

This  balancing  of  exports  and  imports  is  hidden  in 
practice  by  various  conflicting  circumstances.  As  Adam 
Smith  pointed  out,  it  is  practically  impossible  at  any  time 
to  say  what  is  the  actual  balance  of  trade  between  two 
countries.  Accordingly,  what  is  sometimes  called  the 
real  par  of  exchange  in  the  sense  of  an  equality  of  in- 
debtedness would  more  properly  be  called  the  ideal  or 
hypothetical  par.,  which  is  a  useful  assumption  in  certain 
parts  of  the  theory.  It  is  altogether  different  from  the 
nominal  or  mint  par.,  which  expresses  a  definite  relation 
between  the  standard  moneys  of  two  countries. 

It  is  usual  to  speak  (as  in  the  last  chapter)  of  the  trade 
between  two  countries  (say  England  and  France)  as  if 
the  trade  were  run  by  a  gigantic  trust  on  each  side  or 
by  the  respective  governments.  Nothing,  of  course, 
could  be  further  from  the  truth.     It  is  only  for  brevity 

340 


THE   F011EI{;X    EXCHANGES  341 

of  expression  that  we  speak  of  England  trading  with 
France ;  the  trade  between  the  two  countries  is  not  con- 
ducted on  the  principle  of  two  monopolists  contending 
with  one  another,  but  by  a  multitude  of  independent 
merchants.  ^'' Every  tra^isaction  in  commerce  is  an  inde- 
pendent transaction^''  (Ricardo).  Tlie  reconciliation  be- 
tween the  two  positions  is  found  in  the  course  of  prices. 
All  prices  are  determined  by  two  sets  of  causes.  There 
are  relative  causes  that  affect  the  particular  commodities, 
e.g.  special  improvements  in  production  or  special  changes 
in  demand,  and  there  are  general  causes  that  affect  the 
level  of  prices  over  a  wide  range ;  for  some  purposes 
we  consider  causes  so  general  that  they  operate  through 
the  whole  commercial  world.  In  other  cases  we  consider 
the  general  causes  that  determine  the  level  of  prices  in 
a  country,  and  in  some  cases  the  causes  that  affect  the 
prices  of  certain  groups  of  things,  e.g.  the  exports  or  the 
imports.  In  the  foreign  exchanges  we  have  to  consider 
mainly  the  latter.  If  a  particular  merchant  wishes  to 
pay  a  creditor  in  a  foreign  country,  the  cost  of  his  remit- 
tance will  depend  on  the  general  balance  of  the  account 
between  the  two  countries  at  the  time  —  not  that  he 
makes  any  estimate  of  the  aggregate  of  debts ;  but  there 
is  competition  between  the  buyers  and  sellers  of  bills 
drawn  on  the  foreign  country,  and  the  nature  of  this 
competition  indicates  the  state  of  the  indebtedness. 

Besides  the  exports  and  imports  of  commodities,  there 
are  other  elements  in  international  indebtedness  on  ac- 
count of  which  payments  have  to  be  made.  We  have  to 
take  account  of  payments  in  connection  with  freights, 
stock  exchange    securities,   the    advance  of   loans   at   the 


342  ELEMENTS  OF   POLITICAL   ECONOMY 

time  at  which  the  funds  are  remitted,  the  interest  on  the 
loans,  the  repayment  of  the  principal,  the  expenses  of 
government  abroad  or  conversely  receipts  of  tribute,  the 
expenses  of  foreign  residents,  the  obligations  of  banks, 
tlie  profits  on  commissions  of  various  kinds,  and  other 
minor  elements. 

Just  as  in  dealing  vrith  the  quantity  theory  of  money, 
it  was  found  convenient  to  consider  all  the  varying  in- 
fluences as  if  equivalent  to  a  corresponding  increase  or 
decrease  in  the  quantity  of  money,  so  here  it  is  convenient 
to  translate  these  other  elements  of  indebtedness  into  the 
language  of  exports  and  imports.  Tliat  is  to  say,  we 
should  consider  what  would  be  the  effect  on  the  state  of 
international  indebtedness,  if  these  various  obligations 
had  arisen  from  an  increase  of  exports  or  imports  as  the 
case  might  be.  This  procedure  is  not  only  conducive  to 
clearness,  but  must  be  resorted  to  when  we  seek  to  ex- 
plain why  it  is  that  one  country  can  have  year  after  year 
an  excess  of  imports  over  exports  —  apparently  in  glaring 
contradiction  to  the  fundamental  axiom  of  foreign  trade. 

The  truth  is  we  must  take  account  of  what  may  be 
called  the  quasi-exports  and  quasi-imports.  Thus,  for 
example,  a  freight  has  been  well  called  an  invisible  ex- 
port; the  advance  of  a  loan  to  a  foreign  state  is,  so  to 
speak,  an  import  of  securities,  and  we  must  pay  for  these 
securities  by  exporting  more  commodities  ;  the  interest  on 
tlie  loans,  as  it  is  received,  is  equivalent  to  so  much  addi- 
tional imports  —  we  now  receive  imports  in  return  for  the 
coupons  ih?it  WQ  export;  the  expenses  of  our  government 
abroad  or  of  our  absentees  must  be  regarded  as  if  we  had 
to  pay  for  so  much  additional  imports,  these  imports  being 


THE    FOREIGN   EXCHANGES  343 

consumed  on  the  way ;  and  finally  foreigners  have  to  pay 
us  something  on  account  of  commissions  for  the  settle- 
ment of  various  transactions  which  again  is  as  if  they 
had  to  pay  us  for  so  much  additional  exports ;  or  these 
commissions  are  invisible  exports  or  quasi-exports.  It  is 
owing  to  the  balance  of  indebtedness  on  so  many  of  these 
invisible  exports  being  so  much  in  our  favour  that  we  are 
enabled  year  after  year  to  have  an  excess  of  imports. 

It  seems,  then,  not  only  that  exports  and  imports  are  the 
principal  elements  in  international  indebtedness  in  most 
cases,  but  that  they  may  be  taken  as  typical  of  other  forms 
of  indebtedness ;  and  in  this  way  the  central  problem  is 
simplified  without  losing  in  reality. 

2.  International  Debts  are  payable  in  Money.  —  Although 
it  may  be  taken  as  axiomatic  that  exports  are  paid  for  by 
imports  in  the  extended  meaning  of  the  terms,  it  is  equally 
certain  that  the  producers  of  these  exports  are  paid  for 
them  in  the  money  of  their  own  country.  It  is  all  very  well 
to  say  that  the  coal  exported  from  England  is  paid  for  by 
the  wine  imported  from  France,  but  there  is  no  direct  barter 
of  this  kind,  and  the  exchange  or  payment  is  only  possible 
through  the  intervention  of  money.  The  producers  of 
English  coal  are  paid  in  English  money  and  the  growers 
of  French  wine  in  French  money ;  in  some  way  or  other 
the  French  consumers  of  English  coal  must  pay  for  it  in 
English  money  and  they  must  pay  this  money  in  England 
(and  conversely  of  the  wine).  The  way  in  which  this  is 
done  is  explained  by  the  foreign  exchanges. 

"  The  foreign  exchanges  are  transfers  from  the  money  of 
one  country  to  that  of  another  effected  by  the  operation 
of  bills  of  exchange  "  (Tate's  Cambist^.     It  may  happen 


344  ELEMENTS   OF   POLITICAL   ECONOMY 

that  the  different  foreign  countries  have  identical  curren- 
cies, but  the  essence  of  the  operation  is  the  transfer  of 
money  power  from  one  country  to  the  other. 

It  has  been  pointed  out  above  that  every  transaction  of 
commerce  is  an  independent  transaction ;  but  if  this  means 
that  all  the  transactions  are  settled  independently,  we 
should  have  a  multitude  of  parcels  of  coin  flowing  from  one 
country,  passing  in  transit  a  similar  multitude  coming  from 
this  other  country ;  and  the  mints  of  the  respectirve  coun- 
tries would  be  constantly  employed  melting  and  recoining 
foreign  money.  To  avoid  all  these  risks  and  inconven- 
iences, the  foreign  bill  of  exchange  was  invented,  and  it 
may  be  traced  back  to  the  Middle  Ages  and  probably  to 
classical  antiquity. 

To  explain  the  use  of  bills  of  exchange  in  the  settle- 
ment of  international  debts,  suppose  that  American  mer- 
chants have  exported  to  England  corn,  cotton,  etc.,  and 
they  have  drawn  bills  for  the  corresponding  value  on  the 
English  purchasers  or  importers.  These  bills,  being  drawn 
on  London  and  accepted  by  the  merchants  there,  entitle 
the  American  exporters  to  receive  the  money  for  their  ex- 
ports in  London.  But  so  far  they  would  be  no  better  off, 
as  they  would  have  to  fetch  the  gold  from  London.  But 
now  suppose  that  other  American  merchants  buy  from 
London  piece  goods  of  the  same  value  as  this  corn,  etc., 
exported  from  America.  They  can  of  course  settle  their 
debts  in  London  by  sending  gold,  but  they  can  settle  them 
equally  well  by  buying  the  bills  from  the  exporters  and 
sending  the  bills  to  London,  where  they  can  be  cashed  by 
the  sellers  of  the  piece  goods.  Li  this  case  there  is  no 
passage  of  gold  at  all ;  by  the  intervention  of  the  bills  of 


THE   FOKKKiX    EXCHANGES  345 

exchange  the  American  exporters  receive  American  money 
in  America,  and  the  English  sellers  of  cloth,  etc.,  receive 
English  money  in  London. 

In  the  case  supposed  the  debts  are  assumed  to  balance 
exactly  and  the  time  of  payment  to  be  identical,  and  the 
Americans  are  supposed  to  take  the  initiative  as  regards 
both  exports  and  imports.  In  the  actual  complexities  of 
commerce,  however,  the  debts  will  not  exactly  balance  in 
this  simple  way,  and  there  may  be  more  money  due  for 
American  exports  than  for  English  exports  (or  con- 
versely). It  is  this  want  of  coincidence  in  the  debts  that 
gives  rise  to  the  fluctuations  in  the  exchanges.  But  be- 
fore the  fluctuations  are  dealt  with  the  mode  in  which 
the  exchanges  are  quoted  must  be  explained. 

3.  The  Mint  (or  Nominal)  Par  of  Exchange.  —  The  bills 
in  our  illustration  being  drawn  in  pounds  sterling  and 
being  sold  for  dollars,  the  first  thing  to  consider  is  the 
relative  value  of  the  pound  sterling  and  the  dollar.  This 
depends  on  the  amount  of  fine  gold  each  contains,  and  the 
mint  par  of  exehange  expresses  the  relation  between  the  two 
standard  coins  in  terms  of  their  metallic  value.  Thus  the 
mint  par  is  deduced  from  the  legal  definitions  of  the  re- 
spective standard  coins.  In  making  the  comparison  or  cal- 
culating this  mint  par  we  may  consider  one  coin  as  fixed 
and  the  other  as  variable.  Thus,  if  we  take  the  pound 
sterling  as  fixed,  or  as  the  basis,  the  mint  par  with  the 
United  States  is  4.866  dollars,  with  France  25.2215  francs^ 
and  with  Germany  20.43  marks. 

If  the  foreign  coins  were  being  exchanged  at  the  same 
spot  in  order  to  be  melted  down,  and  there  were  no  ex- 
pense in  melting  or  in  recoining,  the  mint  par  would  give 


346  ELEMENTS  OF  POLITICAL  ECONOMY 

the  actual  rate  of  exchange  at  the  time  at  that  place.  But 
seeing  that  the  primary  object  of  the  foreign  exchanges  is 
to  settle  debts  at  different  places,  we  must  take  account  of 
the  expenses  of  remittance,  either  of  the  gold  itself  or  of 
what  will  command  gold.  It  is  the  variation  in  this  ex- 
pense, and  the  distribution  of  it  between  the  two  countries, 
that  causes  the  rise  and  fall  in  the  exchanges. 

4.  Gold  Points.  —  Suppose  that  at  any  particular  time  a 
number  of  people  in  New  York  have  to  make  remittances 
to  London,  and  that  a  number  of  other  people  in  New  York 
are  desirous  of  selling  bills,  etc.,  which  entitle  the  holders 
to  receive  money  in  London.  If  the  demand  exceeds  the 
supply,  the  price  of  these  bills  will  rise.  But  the  limit  of 
the  rise  will  be  given  by  the  point  at  which  it  will  be  just 
as  cheap  for  the  American  debtor  to  send  actual  gold  to 
London.  This  is  the  outgoing  gold  point  from  New  York, 
and  it  is  calculated  as  £1  =  4.891  dollars;  conversely,  if 
the  supply  of  bills  exceeds  the  demand,  the  price  falls  and 
it  may  fall  to  such  a  point  that  it  would  be  just  as  profit- 
able for  the  owner  of  the  bill  —  the  American  creditor  — 
to  send  for  the  gold.  This  is  the  incoming  gold  point  to 
New  York,  and  may  be  taken  at  XI  =  4.831  dollars. 

To  resume  :  the  mint  par  is  .£1  =  4.866  dollars.  If  the 
rate  rises  to  4.891  it  generally  pays  to  send  us  gold  ;  if  it 
falls  to  4.83^,  it  generally  pays  to  take  gold  from  us.  These 
gold  points  or  specie  points  cannot  of  course  be  fixed  with 
absolute  precision,  as  they  depend  on  the  cost  of  transmit- 
ting the  gold ;  but  the  average  is  approximately  certain,  and 
at  present  it  is  only  under  exceptional  circumstances  that 
these  limits  are  exceeded.  Such  occasions  arise  when  there 
is  great  stringency  in  the  money  market,  or  it  may  be  fear 


THE  FOREIGN  EXCHANGES  347 

of  a  monetary  crisis.     (See  Goschen,  Foreign  Exchanges^ 
Chap.  IV.) 

5.  Favourable  and  Unfavourable  Exchange.  —  Fluctua- 
tions in  the  foreign  exchanges  are  described  as  being 
favourable  or  unfavourable.  The  use  of  these  terms  is 
best  explained  by  their  history.  In  former  times  there 
was  always  much  anxiety  about  the  exchange  of  curren- 
cies, and  it  was  considered  an  unfavourable  state  of  the 
exchanges  if  more  money  of  the  home  country  had  to  be 
given  for  foreign  money  than  was  indicated  by  the  par  of 
exchange.  Thus,  if  the  imports  into  England  had  greatly 
exceeded  the  exports,  there  would  be  keen  competition  on 
the  part  of  the  importers  to  buy  the  foreign  bills  and  the 
price  would  rise  to  specie  point ;  people  would  give  more 
for  bills  than  their  nominal  value  up  to  the  limit  at  which  it 
would  be  just  as  cheap  to  send  gold.  Such  a  state  of  the  ex- 
changes would  seem  to  show  that  the  English  currency  was 
not  obtaining  the  full  value  in  terms  of  foreign  currency. 

It  would  also  show  that  there  was  a  danger  of  gold 
itself  being  exported  from  the  country,  and  the  export 
of  gold  was  considered  in  itself  unfavourable  according  to 
the  old  mercantilist  ideas. 

In  reality  an  unfavourable  exchange  is  unfavourable  only 
to  those  who  have  to  send  money  or  pay  money  abroad 
(say,  the  importers),  but  ^|>so  facto  it  is  favourable  to  the 
exporters,  who  are  able  to  sell  their  bills  for  so  much  more. 
The  real  distribution  of  the  loss  and  gain  of  fluctuations  in 
the  exchanges  will  depend  on  the  terras  of  the  contract  of 
sale  as  between  the  buyers  and  sellers. 

There  is,  however,  a  sense  in  which,  under  present  con- 
ditions, an  unfavourable  exchange  may  be  said  to  be  unfa- 


348  ELEMENTS   OF   FOLITICAI.   ECONOMY 

vourable  to  the  country  as  a  whole,  that  is,  when  the  export 
of  gold  is  such  as  to  threaten  the  ultimate  gold  reserves  of 
the  banking  system.  In  this  case  there  may  be  a  sharp 
rise  in  the  rate  of  interest  for  money,  and  possibly  a  sudden 
and  severe  contraction  of  credit. 

It  is  the  passage  of  gold  from  one  country  to  another 
under  these  exceptional  circumstances  that  gives  the  prin- 
cipal interest  to  movements  in  the  exchanges  to  the  mer- 
cantile classes  as  a  whole.  To  the  great  mass  of  people  in 
this  country  who  are  engaged  in  business  of  various  kinds, 
including  banking,  the  movements  of  the  foreign  exchanges 
are  of  no  interest  whatever,  except  in  this  one  particular, 
namely,  if  there  is  a  rise  or  fall  in  the  bank  rate. 

In  considering  the  influence  of  the  rate  of  interest  on 
the  exchanges,  it  is  necessary  to  distinguish  between  long 
and  short  exchange.  The  typical  instrument  for  settling 
foreign  payments  is  the  bill  of  exchange.  If,  then,  this 
bill  is  not  payable  at  sight,  but  (say)  after  three  months, 
its  present  value  for  purposes  of  remittance  is  subject  to 
three  months'  discount.  Accoixlingiy,  if  in  New  York  a 
cable  transfer  on  London  could  be  bought  (say)  at  par,  that 
is,  for  one  pound  payable  in  London,  at  once  1^4.866  would 
be  given,  then  for  a  pound  payable  after  three  months  so 
much  less  would  be  given — and  how  much  less  would 
depend  on  the  rate  of  discount  in  London.  Thus  at  the 
time  of  writing  the  New  Yoik  cable  transfer  exchange  is 
4.88|,  and  the  exchange  at  sixty  days'  usance  4.85. 

In  certain  cases  the  rate  of  interest  in  the  country  which 
draws  the  bill  may  be  of  importance  in  affecting  the  ex- 
changes. Suppose  that  the  rate  of  discount  in  Paris  falls 
much  below  tlie  London  rate.     One  natural  and  obvious 


Till-:    FOKKKIN    EXCHANGES  349 

result  would  be  that  Paris  bankers  would  wish  to  send 
money  for  investment  in  London  at  the  more  profitable 
rate,  and  thus  the  exchange  would  so  far  turn  in  our 
favour.  This  natural  and  obvious  influence  would  be 
intensified  by  a  less  obvious  cause.  Bills  drawn  on  Lon- 
don by  Paris,  having  their  present  value  calculated  at 
the  London  rate,  would  be  a  good  investment  for  Paris 
bankers.  Thus  they  would  compete  for  these  bills,  not 
for  remittance,  but  for  investment.  This  extra  demand, 
however,  must  also  turn  the  exchange  in  our  favour  still 
more,  or  at  least  make  the  movement  more  speedy.  It  is, 
of  course,  the  difference  in  the  rates  that  is  of  importance, 
and  shows  how  a  rise  in  the  bank  rate  tends  to  attract 
gold. 

Closely  connected  with  the  rate  of  interest  is  the  state 
of  credit  in  both  the  countries  considered.  The  docu- 
ments used  for  remittance  are  credit  instruments,  and  the 
typical  bill  of  exchange  rests  ultimately  on  the  credit  of 
both  the  drawer  and  the  acceptor.  The  state  of  credit  is 
also  an  important  factor  in  the  determination  of  the  rate 
of  interest.  Although  for  the  explanation  of  the  prin- 
ciples only  two  countries  have  been  taken  for  illustra- 
tion, the  rates  subsisting  between  two  places  will  depend 
partly  on  the  rates  with  other  places.  It  might  be  cheaper 
to  make  a  remittance  by  a  roundabout  method  with  a  cer- 
tain difference  in  the  rates.  The  adjustment  of  these  rates 
is  called  the  arbitrage  of  the  exchanges.  This  arbitrage 
tends  to  steady  the  exchanges  as  between  any  two  places. 
Similarly,  the  operations  of  banks  add  to  this  stability  by 
creating  paper  for  remittance  to  pay  for  imports  which  are 
really  paid  for  by  exports  at  a  later  date. 


350  ELEMENTS  OF  POLITICAL  ECONOJ^IY 

6.  Effects  of  a  Depreciation  of  the  Currency.  —  The  im- 
mediate effects  of  a  depreciation  of  the  currency  on  the 
exchanges  are  easily  understood  simply  by  taking  account 
of  the  premium  on  gold.  If  a  sovereign  will  buy  so  many 
francs  at  the  mint  par,  and  if  the  francs  are  depreciated, 
the  sovereign  must  obtain  so  many  more  in  proportion  to 
the  extent  of  the  depreciation.  If  the  depreciation  is  very 
great,  as  often  happens  with  inconvertible  notes,  the  appar- 
ent course  of  the  exchanges  depends  entirely  on  the  fluc- 
tuations in  the  depreciation.  The  other  causes  are  still 
there,  e.g.  the  balance  of  trade,  the  rate  of  interest,  etc., 
but  their  effect  is  hidden  altogether  by  the  premium  on 
gold.  There  are  also  in  this  case  no  limits  to  the  nominal 
or  apparent  rise  in  the  exchange  —  that  is,  taking  the 
sovereign  as  fixed,  and  the  depreciated  currency  as 
variable. 

Here  it  may  be  noticed  that  if  we  are  considering  the 
case  of  remittance /row  a  country  with  a  depreciated  cur- 
rency, so  much  more  will  have  to  be  given  for  the  bill 
payable  in  gold  in  the  foreign  country,  and  the  price  may 
rise  to  the  extent  of  the  premium  on  gold,  plus  the  cost 
of  remitting  the  gold.  Suppose,  however,  that  no  gold  is 
obtainable :  in  this  case  there  seems  to  be  no  limit  to  the 
rise  in  the  price  of  the  bills.  The  real  limits  are  given  by 
the  cost  of  sending  some  export  that  otherwise  would  not 
have  been  sent.  Thus  we  have  not  only  gold  points,  but 
also  similar  export  points  for  all  exportable  commodities- 
People  who  have  to  buy  gold  with  a  depreciated  currency 
may  find  that  it  will  be  cheaper  to  send  some  form  of 
produce  to  the  foreign  country,  and  to  purchase  the  gold 
there  with  the  sale  of  the  produce,  rather  than  to  buy  the 


THE  FOREIGN  EXCHANGES  361 

gold  at  an  extravagant  premium,  and  in  addition  pay  the 
cost  of  remittance. 

7.  Indirect  Effects  of  a  Depreciation  of  the  Currency  on 
the  Foreign  Trade  of  a  Country.  —  We  may  now  consider 
the  effects  of  the  depreciation  of  a  currency  on  its  foreign 
trade  in  general.  And  for  simplicity  the  case  of  in- 
convertible notes  may  be  taken.  It  may  be  shown  that 
the  effects  will  vary  according  to  the  mode  in  which 
the  depreciation  takes  place.  Suppose  that  the  notes 
become  discredited  almost  as  soon  as  issued  —  that  is  to 
say,  that  a  premium  on  gold  arises  before  there  is  any 
depreciation  of  the  notes  as  regards  commodities  or  any 
general  inflation  of  prices.  In  this  case  exporters  from 
this  country  can  sell  their  exports  at  the  usual  rates 
abroad,  and  with  the  gold  obtained  they  can  purchase 
more  notes  to  the  extent  of  the  premium.  And  so  long 
as  prices  do  not  rise  to  the  extent  of  this  premium,  there 
will  be  this  so-called  bounty  on  exports.  In  the  same 
way  it  may  be  shown  that  there  will  be  a  check  to  im- 
ports. The  imports  will  only  obtain  the  same  prices  as 
before,  but  to  remit  the  proceeds  in  gold  more  of  the 
notes  must  be  given  to  the  extent  of  the  premium.  Sup- 
pose next  that  the  notes  are  issued  in  such  a  way  that 
prices  rise  through  the  inflation  of  the  currency  before 
the  premium  on  gold  is  established.  In  this  case  ex- 
ports to  the  country  will  be  stimulated  and  exports  from 
it  will  be  checked;  the  final  result  will  be  that  the  ad- 
verse balance  must  be  met  in  gold,  and  there  will  in  time 
arise  a  premium  on  gold ;  it  is  possible  that  the  rise  in 
the  premium  may  be  so  great  that  there  will  be  a  rever- 
sion to  the  first  case. 


352  ELEMENTS  OF   POLITICAL  ECONOMY 

If  all  the  parties  concei'iied,  directly  and  indirectly,  in 
the  export  and  import  of  commodities  were  to  ignore 
the  proclamations  of  the  government  as  regards  the 
use  of  notes,  and  were  to  persistently  make  all  their 
monetary  bargains  on  a  gold  basis,  and  if  they  used  the 
notes  at  all,  only  did  so  at  their  value  in  terms  of  gold, 
then  there  would  be  7io  effect  on  the  foreign  trade  through 
the  depreciation.  It  is  very  doubtful  if  this  theoretical 
result  is  ever  attained  in  practice.  The  people  Avho 
really  pay  for  the  imports  are  the  consumers  in  the 
country  with  the  depreciated  currency,  and  the  people 
who  must  eventually  receive  the  money  for  the  exports 
from  this  country  are  the  producers  there  ;  and,  in  general, 
both  producers  and  consumers  are  obliged  to  use  this 
depreciated  paper,  and  they  do  not  understand  fluctua- 
tions or  make  accurate  allowance  for  them.  Thus,  alto- 
gether apart  from  foreign  trade,  it  is  well  known  that 
the  mercantile  classes  often  gain  at  the  expense  of  the 
consumers,  especially  the    working   classes. 

In  any  case  the  foreign  trader  may  insure  himself 
against  risk  by  making  his  bargains  on  a  sterling  basis 
of  exchange,  but  he  cannot  prevent  the  depreciation  af- 
fecting the  conditions  of  demand  and  supply  in  the 
internal  markets  of  the  country  concerned ;  these  mar- 
kets are  influenced  by  the  extent  and  the  mode  of  the 
depreciation,  and  indirectly  they  affect  the  foreign  trade. 
Similar  reasoning  may  be  applied  to  the  case  of  the  de- 
preciation of  silver,  though  this  case  is  more  complicated. 
(See  Money  and  Monetary  Problems^  ]).  342  sq.^ 

There  are  other  problems  connected  with  foreign  trade 
that   are  in   my   opinion  best  explained   by  taking   into 


Tin:   FOREIGN   EXCHANGES  353 

account  Ihe  foreign  exchanges.  Such  are  the  effects  on 
the  balance  of  trade  and  thus  on  the  distribution  of  the 
advantages  of  the  introduction  of  some  new  export  due 
to  a  fall  in  price  consequent  on  an  improvement  in  pro- 
duction. The  argument  adopted  by  Mill  (^PrincijAes, 
Book  III,  Chap.  XXI)  is  as  follows  :  this  new  export  will 
disturb  the  balance  of  trade;  the  imports  to  the  country 
will  no  longer  balance  the  exports,  and  in  consequence 
money  will  flow  to  the  country;  prices  will  rise  there 
and  fall  in  the  other  country  in  response  to  this  redis- 
tribution of  the  gold,  and  thus  exports  from  the  first 
country  will  be  checked  and  imports  into  it  increased 
until  the  balance  is  restored.  If  there  are  only  two 
countries  to  be  considered,  and  if  the  price  levels  are 
supposed  to  be  adjusted  directly  in  response  to  the 
movements  of  gold  and  in  proportion  to  the  quantities, 
and  if  various  other  hypotheses  are  made,  this  modus 
operandi  might  serve  as  an  explanation.  But  when  we 
consider  that  the  new  export  may  be  sent  to  all  parts 
of  the  world,  and  that  owing  to  other  causes  the  flow  of 
gold  may  be  in  a  different  direction,  this  explanation 
seems  to  fail  to  meet  the  complexities  of  real  foreign 
trade.  In  the  same  way  the  argument  of  Mill,  to  the 
effect  that  the  respective  countries  gain  and  lose  in  a 
general  way  by  these  effects  on  their  respective  price 
levels,  though  highly  ingenious  and  as  an  example  of 
abstract  reasoning  very  instructive,  seems  inapplicable 
to  actual  conditions.  The  case  of  the  payment  of  a 
tribute  from  one  country  to  another  involves  the  same 
reasoning  and  the  same  assumptions. 

The  preferable   view  in   my  opinion   in  both  of   these 


354  ELEMENTS  OF  POLITICAL  ECONOMY 

cases  is  that  the  adjustment  of  the  payments  is  made  not 
by  any  operation  on  general  prices  and  the  transmission  of 
gold,  but  by  the  export  of  any  exportable  commodity  that 
is  on  the  "  margin  of  doubt "  as  to  its  destination.  (See 
Principles,  Vol.  II,  Book  III,  Chap.  XXVI,  Sees.  12-14.) 
8.  On  the  Distribution  of  Gold  throughout  the  Commer- 
cial World.  —  If  we  take  a  system  of  gold-using  countries, 
the  levels  of  prices  in  particular  countries  are  adjusted 
to  the  general  level  throughout  the  system  having  regard 
to  special  causes  of  difference.  Broadly  speaking,  gold 
may  be  sent  from  one  country  to  another  for  two  pur- 
poses. It  may  be  sent  to  meet  previous  obligations;  but 
it  will  not  be  so  sent  if  cheaper  modes  of  remittance  are 
available.  Exports  pay  for  imports  through  the  medium 
of  bills,  and  it  is  only  when  the  bills  fail  that  gold  is  sent 
for  the  relatively  small  balance.  And  even  as  regards  this 
balance,  it  may  be  met  by  sending  securities  or  any  readily 
saleable  export.  If  gold  is  thus  sent,  it  augments  the  bank- 
ing reserves  of  one  country  and  so  far  diminishes  those  of 
the  other ;  but  in  general  there  is  no  direct  expansion  and 
contraction  of  the  respective  currencies,  and  still  less  is  the 
course  of  international  trade  determined  by  the  rise  and 
fall  of  the  general  price  levels  in  different  countries  in 
response  to  these  movements  of  gold.  The  shipment  of 
gold  follows  and  does  not  determine  the  course  of  trade. 
But  gold  may  also  be  sent  from  one  country  to  another  for 
banking  requirements.  If  a  country  finds  its  banking 
reserves  getting  low,  it  seeks  to  correct  the  exchanges  by 
raising  its  rate  of  discount.  The  movements  of  gold  on 
this  account  are  of  general  importance  only  in  exceptional 
times. 


THE  FOREIGN  EXCHANGES  355 

Commercial  countries  are  now  so  closel}'"  connected  that 
we  have  to  compare  any  one  with  the  rest  of  the  world. 
Any  stimulus  to  exports  or  imports,  due  to  the  movements 
of  gold,  being  diffused  through  such  a  wide  area,  is  speedily 
lost;  and  on  the  whole  the  differences  between  domestic 
and  foreign  trade  tend  to  become  less  and  less  except  as 
regards  political  influences  and  tariffs.^ 

1  The  standard  work  on  the  foreign  exchanges  is  that  of  Goschen.  The 
only  drawback  is  that  the  illustrations  are  for  the  most  part  out  of  date. 
This  fault  may  be  remedied  by  reference  to  Clare's  ABC  of  the  Foreign 
Exchanges.  For  the  effects  of  depreciations  and  for  a  critique  of  the 
usual  argument  on  the  distribution  of  gold  see  Principles,  Book  III,  Chap. 
XXVI,  and  Money  and  Monetary  Problems,  essay  on  "  Movements  in  Gen- 
eral Prices,"  also  Bankers''  Money.,  Chap.  II. 


CHAPTER   XV 

ADVANTAGES   AND  DISADVANTAGES   OF   FOREIGN  TRADE 

1.  The  Real  Advantages  of  Foreign  Trade. — The  most 
obvious  advantages  of  foreign  trade  are  those  obtained  by 
the  consumers  of  the  respective  countries.  They  obtain 
goods  that  cannot  be  produced  at  home,  as  in  the  exchange 
of  the  produce  of  the  tropics  for  that  of  the  temperate 
zones.  And  things  that  can  be  produced  at  home  are 
obtained  more  cheaply  and  abundantly  from  foreign  sources 
of  supply.  The  second  of  these  advantages  follows  from 
the  theory  of  comparative  cost. 

Unless,  then,  it  can  be  shown  that  the  incomes  of  consum- 
ers are  adversely  affected  by  foreign  competition,  and  that 
they  fall  more  than  in  proportion  to  the  full  in  the  price  of 
commodities,  there  is  a  real  gain  to  the  consumers  under 
both  heads.  It  is  claimed  for  the  theory  of  consumers'  rent 
(or  surplus)  that  it  measures  this  gain  more  accurately 
than  is  possible  by  mere  descriptive  methods. 

When  we  look  to  the  incomes  of  consumers  the  most 
obvious  consideration  is  that  they  are  for  the  most  part  the 
earnings  of  producers.  And  here  the  principle  is  applied 
that  is  fundamental  in  foreign  trade,  namely,  that  imports 
must  be  paid  for  by  exports.  Accordingly,  when  a  foreign 
trade  arises  and  displaces  some  commodity  formerly  pro- 
duced at  home,  it  is  nrgued  that  if  the  trade  is  to  continue, 
the  corresponding  labour  and  capital  displaced  must  be 

356 


FOREIGX   TRADE  357 

employed,  in  part  at  least,  in  making  some  export  that  will 
1)6  taken  by  the  foreigner  in  return  for  his  export  sent  to 
us.  If  the  foreigner  does  not  take  our  new  export  directly, 
he  must  take  payment  from  some  country  that  will  — 
otherwise  the  fundamental  axiom  of  foreign  trade  would  be 
contravened.  It  is  also  maintained  that  the  rest  of  the  capi- 
tal and  labour  displaced  from  the  home  industry  cannot  in 
general  be  sent  abroad  and  will  flow  to  the  most  advan- 
tageous emploj^ment  in  the  home  country.  Here  the  as- 
sumption is  that  all  the  productive  powers  of  a  country  can 
find  some  kind  of  employment,  if  not  in  some  things  then 
in  "  other  things."  This  argument  is  popularly  expressed 
in  relation  to  commercial  treaties  in  the  saying.  Take  care  of 
the  imports,  and  the  exports  will  take  care  of  themselves. 

If  this  natural  course  of  trade  is  allowed  free  play,  every 
country  will  produce  for  itself  and  for  other  countries  that 
in  which  it  has  the  greatest  relative  advantage  (or  least 
disadvantage),  and  on  the  whole  there  will  be  a  greater 
return  to  the  aggregate  productive  powers  of  the  world,  or 
for  the  same  return  as  before  there  will  be  a  less  expendi- 
ture of  labour  and  effort. 

It  is  also  maintained  that  the  extension  of  territorial 
division  of  labour  and  localisation  of  industries  will,  in 
general,  increase  the  aggregate  productive  powers  still 
more ;  and  the  real  increase  of  wealth  or  leisure,  to  be 
divided  between  the  various  trading  nations,  will  be  so 
much  greater. 

Furthermore,  it  is  maintained  that  this  extension  of  the 
range  of  markets,  at  any  rate  in  times  of  peace,  tends  to 
steady  both  supply  and  demand,  and  thus  to  steady 
prices,  and   this  steadiness   is   further   increased   by    the 


358  ELEMENTS   OF   POLITICAL   ECONOMY 

development  and  inter-connection  of  the  national  credit 
systems.  Again,  this  reciprocity  of  interest  in  turn 
strengthens  the  guarantees  for  peace  and  induces  nations 
to  render  mutual  services  of  various  kinds,  as  in  railways, 
postal  and  telegraphic  communications,  safeguards  for 
navigation  and  the  like.  This  general  increase  of  security 
is  shown  in  a  marked  manner  if  we  compare  mediaeval 
with  modern  commerce. 

There  can  be  no  doubt  that  these  and  similar  advantages 
have  been  obtained  by  the  world  at  large  through  the 
progress  of  international  commerce.  And  in  some  cases, 
especially  in  that  of  the  United  Kingdom,  the  national 
progress  has  been  increased  to  a  wonderful  degree  by 
the  development  of  foreign  trade,  especially  in  the  nine- 
teenth century. 

At  the  same  time  it  is  possible  that  some  particular 
nation  under  certain  conditions  may  suffer  whilst  all  the 
world  gains,  just  as  a  particular  district  in  any  one  coun- 
try may  suffer  whilst  all  the  rest  of  the  country  benefits 
by  the  transfer  of  labour  and  capital. 

It  may  be  useful  to  notice  some  of  the  possible  dis- 
advantages, from  the  national  standpoint,  that  may  arise 
from  the  extension  of  foreign  trade  in  general,  or  of 
some  particular  branches. 

2.  Possible  Disadvantages  of  Foreign  Trade  to  a  Particu- 
lar Country.  —  Even  from  the  consumers'  point  of  view  dis- 
advantages may  arise  ;  as  when  the  greater  interests  of  tlie 
future  are  sacrificed  to  the  lesser  interests  of  the  present. 
Thus  limited  natural  resources  of  various  kinds  may  be 
exploited  rapidly  and  wastefully,  so  that  a  few  years' 
cheapness  may  be  outweighed  by  many  years'  dearness. 


FOREIGN  TRADE  359 

In  technical  language  the  law  of  diminishing  return  may 
come  into  play  sooner  and  more  severely  in  consequence 
of  large  exports,  e.g.  coal.  A  country  that  exports  con- 
tinuously large  quantities  of  raw  produce,  e.g.  corn,  may 
be  said  to  export  the  land  itself  (Carey). 

Again,  it  is  generally  admitted  that  the  consumer  is  not 
always  the  best  judge  of  his  own  interests,  as  is  shown  in 
the  case  of  material  commodities  by  laws  against  adultera- 
tion and  the  like.  It  is  quite  possible  that  a  cheap  foreign 
product  may  be  less  advantageous  than  the  corresponding 
dearer  home  product,  and  that  it  may  be  advantageous 
to  prohibit  the  importation  of  certain  foreign  goods  {e.g. 
spirits  into  certain  new  countries,  opium  into  China,  etc.). 

From  the  producers'  point  of  view  theoretical  exceptions 
may  be  discovered  to  the  universal  benefits  of  foreign  trade. 
The  assumption  that  labour  and  capital  can  always  be 
diverted  from  an  industry  that  is  ruined  by  foreign 
competition  to  "  something  else,"  will  obviously  not  hold 
good  of  the  capital  and  labour  that  are  specialised  to  a 
high  degree.  In  every  nation  the  principal  trade  is 
between  the  towns  and  the  country.  Now  it  is  quite 
possible  that  the  opening  up  of  foreign  markets  may 
seriously  injure  either  the  manufactures  of  the  towns 
or  the  agriculture  of  the  country.  Suppose  that  English 
manufactures  find  a  ready  market  abroad,  and  that 
foreign  food-stuffs  find  a  ready  market  in  England,  so 
that  there  is  a  great  expansion  of  trade  on  both  sides. 
The  balance  of  trade  may  be  simply  preserved  by  the 
contraction  of  English  agriculture,  and  the  labour  and 
capital  employed  in  agriculture  can  only  be  gradually 
and  partially  diverted   to   manufactures.     The   manufac- 


360  ELEMENTS   OF   POLITICAL   ECONOMY 

turing  classes,  it  is  true,  benefit  as  consumers  of  food; 
but  from  the  producers'  point  of  view,  it  may  happen 
that  the  depression  in  agriculture  more  than  outweighs 
the  gains  in  manufacture.  If  there  is  a  rapid  transfer 
of  labour,  the  overcrowding  of  cities  and  the  depopula- 
tion of  the  country  may  deteriorate  the  general  condi- 
tions under  which  work  is  carried  on,  and  intensify  the 
disutility  of  labour.  It  is  notorious  that  the  progress  of 
English  manufactures  after  the  industrial  revolution  was 
accompanied  by  great  social  evils. 

It  may  be  recalled,  in  this  connection,  that  one  of  the 
cases  that  Adam  Smith  thought  worthy  of  the  delibera- 
tion of  governments,  as  regards  the  continuance  of  a 
protective  policy,  was  when  the  industry  threatened  by 
the  adoption  of  free  trade  gave  employment  to  a  large 
number  of  labourers.  In  this  case  he  said,  "  Humanity 
dictates  that  the  freedom  of  trade  should  only  be  re- 
stored by  slow  gradations."  This  is,  of  course,  a  form 
of  the  general  argument  of  the  rights  of  vested  interests 
of  labour  and  can  only  be  used  with  caution. 

Again,  if  we  take  the  case  of  a  new  country,  it  will 
naturally  turn  its  attention  to  the  production  of  agricul- 
tural products  and  raw  material.  Ikit  this  excessive 
devotion  to  the  extractive  industries  will  so  far  check 
manufactures  and  the  growth  of  towns.  It  is  possible 
that  in  the  end  even  agriculture  may  suffer  because 
there  is  no  near  market  for  its  by-products.  Most  econ- 
omists, including  Adam  Smith  and  Mill,  have  noticed 
this  argument  in  favour  of  protection  to  new  countries. 
On  the  other  hand,  it  may  be  pointed  out  that  there 
is  the  danger  of  the  creation  of  vested  interest,  and  that 


FOREIGN  TRADE  361 

the  temporary  protection  begets  all  kinds  of  protection. 
It  is  possible  that,  at  the  same  time,  both  the  manufac- 
tures and  tlie  agriculture  of  an  old  country  might  suffer 
from  the  competition  of  new  and  rising  countries.  Al- 
though it  is  true  that  all  trade  is  barter,  and  that  com- 
modities pay  for  commodities,  it  is  also  true  that  exchanges 
are  only  effected  by  the  intervention  of  money,  not 
necessarily  as  a  medium  of  exchange,  but  as  a  measure 
of  values.  It  is  extremely  diflicult  to  adjust  wages  and 
fixed  charges  to  changes  in  prices  due  to  foreign  com- 
petition. When  it  is  said  that  foreign  competition 
renders  some  manufacture  impossible,  it  is  often  only 
true  with  the  understanding  that  the  old  rates  of  re- 
muneration are  to  be  maintained.  In  the  end  no  doubt 
the  fall  in  wages  must  take  place  if  rendered  necessary 
by  foreign  competition,  but  the  fall  may  be  resisted  so 
long  that  the  market  is  lost  or  only  partially  retained. 
And  in  any  case,  there  is  the  difficulty  that  the  wages 
in  this  particular  trade  must  normally  stand  in  a  certain 
relation  to  wages  in  general. 

The  idea  on  which  Adam  Smith  so  often  insists,  namely, 
that  the  richer  the  neighbours  of  a  country,  so  much  the 
better  for  that  country,  is  not  always  and  necessarily  true. 
In  effect,  the  richer  countries  may  compel  the  poorer  to 
become  self-supporting.  They  may  obtain  their  food  and 
raw  material  from  distant  and  unexploited  lands,  and 
make  all  their  manufactures  cheaper  than  the  poorer 
country.  The  injury  that  may  be  caused  to  a  nation  by 
the  opening  up  of  some  new  trade  route,  or  by  the  con- 
version of  a  roundabout  trade  into  a  direct  one,  has  been 
exemplified    in    history    by    the    transfer    of   commercial 


362  ELEMENTS  OF  POLITICAL  ECONOMY 

supremacy  from  northern  Italy  to  Holland,  and  from  Hol- 
land to  Britain. 

It  is  extremely  difficult  in  foreign  trade  to  estimate 
accurately  the  advantages  and  disadvantages  when  we 
have  to  compare,  for  example,  the  benefit  of  a  fall  in  price 
with  the  evil  of  the  loss  of  employment.  If  a  number 
of  people  lose  their  regular  employment,  or  are  converted 
from  skilled  to  unskilled  labourers,  there  may  be  little 
real  compensation  in  the  fact  that  a  far  greater  number 
obtain  some  kinds  of  commodities  a  little  cheaper.  This 
truth  was  well  expressed  by  Mr.  Gladstone  when  he 
declared  that  the  working  classes  would  benefit  more  by 
fiscal  reforms,  that  extended  the  field  of  emplojanent,  than 
by  such  as  reduced  the  prices  of  consumable  commodities. 
"  It  is  a  mistake  to  suppose  that  the  best  mode  of  giving 
benefit  to  the  labouring  classes  is  simply  to  operate  on 
the  articles  consumed  by  them ;  if  you  want  to  do  them 
the  maximum  of  good,  you  should  rather  operate  on  the 
articles  which  give  them  a  maximum  of  employment." 

It  may  be  recalled  that  with  Adam  Smith  the  funda- 
mental test  applied  as  regards  the  relative  advantages  of 
different  modes  of  employing  capital  is  the  effect  on  the 
employment  of  labour  within  the  country.  The  proxi- 
mate cause  of  any  change  in  the  direction  of  trade  is  a 
change  in  the  profit  to  be  obtained.  But  maximum 
profit  is  by  no  means  synonymous  with  maximum  national 
advantage.  Adam  Smith  made  the  difference  abundantly 
clear ;  but  in  the  attempt  to  make  the  popular  argument 
for  free  trade  simple  and  dogmatic,  his  complex  reason- 
ings were  forgotten.  The  most  striking  illustration  of 
the  difference  between  pi;ofit  and  advantage  is  found  in 


FOREIGN  TRADE  363 

the  central  position  of  his  attack  on  the  monopoly  of  the 
colonial  trade ;  the  root  cause  of  the  evils  of  that  monop- 
oly in  his  view  is  to  be  found  in  the  high  rate  of  profit  to 
which  it  gives  rise,  directly  in  the  colonial  trade  and 
indirectly  in  all  other  trades. 

The  popular  idea  that  so  long  as  the  capital  gave  equal 
profits,  it  was  a  matter  of  indifference  to  the  nation  at 
large  to  what  employment  it  was  directed,  was  not  only 
not  approved  of  by  Adam  Smith,  but  was  distinctly  con- 
troverted by  hira.  Thus,  the  most  advantageous  of  all 
the  employments  of  capital  was  in  agriculture,  although 
the  profit  was  less  than  in  the  distant  colonial  trades 
and  in  the  carrying  trade.  Of  all  the  employments  of 
capital,  that  in  the  carrying  trade  was  the  least  advan- 
tageous to  the  nation  as  a  whole,  because  the  real  advan- 
tages were  obtained  by  other  nations,  whilst  we  only 
obtained  the  profit  or  commission.  On  other  grounds, 
indeed,  he  approved  of  the  encouragement  given  to  that 
trade  by  the  Navigation  Acts,  but  the  chief  reason  as- 
signed is  that  defence  is  of  more  importance  than  opu- 
lence; that  is,  the  Acts  were  approved  of  on  political  and 
not  on  economic  grounds. 

A  similar  argument  to  that  employed  by  Adam  Smith 
may  be  advanced  by  taking  into  account  not  only  the 
quantity  of  the  employment,  but  also  its  quality.  It  is 
to  the  advantage  of  a  nation  that  its  people  should  not 
be  simply  hewers  of  wood  and  drawers  of  water,  but 
rather  engaged  in  crafts  that  demand  a  high  degree  of 
skill.  This  idea  was  recognised  by  the  founders  of  the 
mercantilist  policy,  and  was  developed  in  a  remarkable 
way  by  List     (^National   System  of  Political   Economy^  ; 


364  ELEMENTS   OF   rOLITICAL   ECONOMY 

but  in  recent  times  it  was  a  favourite  theme  of  Mr.  Glad- 
stone- 
It  would  be  easy  to  multiply  examples  of  the  pos- 
sible disadvantages  that  a  particular  nation  may  suffer, 
although  the  world  may  gain,  from  the  development  of 
foreign  trade  in  certain  directions.  It  is  even  possible  to 
show  that  there  are  cases  in  which  the  world  at  large 
might  lose  by  the  premature  extension  of  foreign  trade. 
(See  the  ingenious  argument  of  Sidgwick,  Principles  of 
Political  Economy^  Book  III,  Chap.  V.) 

How  far  the  government  of  a  country  by  duties  or 
bounties,  by  preferences  or  prohibitions,  by  commercial 
treaties  or  retaliation,  may  contrive  to  minimise  such 
disadvantages,  will  depend  partly,  at  any  rate,  on  the 
wisdom  and  on  the  powers  of  governments.  It  is  one 
thing  to  admit  an  evil ;  it  is  quite  another  to  provide  a 
remedy.  The  possible  disadvantages  of  foreign  trade  may 
be  further  increased  by  the  fiscal  action  of  foreign  states 
and  by  the  action  of  foreign  '-^  trusts."  (See  below.  Book  V, 
on  the  economic  functions  of  government.)  ^ 

1  The  literature  on  the  subject  of  this  chapter  is  voluminous.  For  an 
account  of  the  views  of  Adam  Smith,  see  introductory  essay  by  present 
writer  to  Wealth  of  Nations  (Nelson)  ;  Sidgwick,  Principles  of  Political 
Economy,  Book  II,  Chap.  Ill,  and  Book  III,  Chap.  V ;  List,  National 
System  of  Political  Economy ;  Patten,  The  Economic  Basis  of  Protection  ; 
Bastable,  International  Ti-ade ;  and  also  Commerce  of  Nations. 


BOOK  IV 
ECONOMIC  PROGEESS 


CHAPTER  I 

THE  NATURE  AND  MEASUREMENT  OF  ECONOMIC  PROGRESS 

1.  Connection  of  Economic  Progress  with  General  Progress. 

—  Just  as  attempts  have  been  made  to  reduce  political 
economy  to  a  branch  of  a  system  of  general  sociology,  so 
also  it  has  been  maintained  that  economic  progress  can 
only  be  understood  as  part  of  progress  in  general.  The 
progress  of  society  includes,  no  doubt,  many  factors  which 
indirectly  affect  economic  progress,  e.g.  religion,  morality, 
law,  art,  etc. ;  but  it  is  impossible  to  deduce  the  idea  of 
economic  progress  from  the  wider  idea  of  social  progress. 
The  idea  of  progress  in  general  has  always  proved 
elusive,  and  perhaps  the  most  remarkable  result  of  the 
history  of  philosophy  is  that  the  idea  of  progress  has  in 
general  lagged  behind  the  reality.  Nations  have  progressed 
without  any  idea  of  progress ;  and  the  progress  has  been 
very  real,  even  in  cases  which  we  have  been  accustomed 
to  regard  as  typical  examples  of  stagnation.  It  is  asserted 
by  Professor  Flint  that  in  China  there  was  as  real  progress 
in  the  actual  development  of  thought  and  history  as  in 
Greece  itself ;  but,  as  in  so  many  other  eastern  nations, 
in  place  of  any  idea  of  progress  there  was  only  an  idea  of 
cosmical  and  human  cycles.  Again,  in  the  mediaeval 
period  in  every  department  of  human  activity  there  was 
very  great  progress,  but  there  was  no  corresponding  com- 
prehensive idea.     From  the  sixteenth  century  onward  a 

367 


3G8  ELEMENTS   OF   POLITICAL   ECONOMY 

number  of  attempts  were  made  to  express  the  idea  of 
progress,  sometimes  derived  from  the  perfections  of  God 
and  sometimes  from  tire  perfectibility  of  man,  but  none 
was  accepted  by  thinkers  as  satisfactory. 

In  the  hitter  half  of  the  nineteenth  century,  however, 
the  theory  of  evolution  has  been  thought  to  give  a  formula 
which  can  be  applied  to  the  universe  in  general,  and  every 
part  and  process  of  it.  It  is  impossible  here  to  discuss, 
even  in  outline,  the  general  theory  of  evolution.  But  some 
points  may  be  noticed  as  bearing  on  economic  progress. 
It  will  be  generally  admitted  that  the  theory  or  formula 
of  evolution  is  useful  in  providing  a  general  terminology, 
and  in  suggesting  lines  of  inquiry,  methods  of  classifica- 
tion, and  ideas  of  continuity;  but  so  far  its  aid  is  only 
formal,  as  in  the  case  of  logic  and  mathematics. 

The  general  theory  of  evolution  provides  no  easy  substi- 
tute for  the  examination  of  the  particular  evidence  that 
every  science  requires.  It  may  be  said,  for  example,  that 
constitutional  history  affords  an  excellent  example  of  evo- 
lution ;  the  formula  can  be  applied  in  every  detail,  but  it 
will  not  enable  the  historian  to  dispense  with  the  examina- 
tion of  a  single  document.  And  if  we  accept  the  ideas  of 
evolution  in  general,  as  applicable  over  a  wide  range  of 
very  different  phenomena,  we  must  be  careful  not  to  mis- 
take vague  analogy  for  reasoning  ;  and  we  must  beware 
more  than  ever  of  the  use  of  inappropriate  conceptions, 
which  in  all  ages  has  been  the  greatest  hindrance  to  real 
scientific  progress. 

In  particular,  we  cannot  transfer  directly  the  ideas  of 
biology  to  economics ;  we  may,  indeed,  use  the  terms 
survival    of    the   fittest^    reversions^     atavism^    differetitia- 


THE  naturp:  of  economic  ruociiEss       309 

tion,  and  so  forth,  without  much  danger,  but  we  cannot 
descend  into  the  mysteries  of  protoplasm  and  the  nature 
of  heredity  in  the  lowest  forms  of  life  with  any  hope 
of  obtaining  light  on  primitive  economic  structures. 
The  conclusion  is  that  in  dealing  with  economic  progress 
we  must  deal  with  economic  ideas  and  with  economic 
facts. 

With  regard  to  the  facts,  it  is  necessary  to  go  to  the 
researches  of  the  economic  historians ;  but  in  dealing  with 
historical  facts  it  is  necessary  to  have  certain  guiding  ideas. 

2.  The  Nature  of  Economic  Progress.  —  The  simplest 
idea  involved  in  economic  progress  is  increase  in  wealth. 
In  making  quantitative  estimates  of  national  wealth,  we 
naturally  adopt  the  monetary  standard ;  and  the  first  pre- 
caution is  to  make  allowances  for  any  changes  in  the  value 
of  the  standard.  Such  a  change  may  have  arisen,  if  we 
are  comparing  distant  periods,  either  through  causes 
affecting  the  standard  itself,  as  in  the  change  in  the 
meaning  of  the  pound,  or  through  any  of  the  causes 
affecting  its  value,  such  as  are  enumerated  in  the 
quantity  theory.      (See  above,  Book  III,  Chap.  VI.) 

We  must  also  consider  the  qualities  of  the  things  that 
at  different  times  are  called  by  the  same  names,  e.g.  bread, 
houses,  cloth,  etc. 

Next  to  the  increase  of  wealth  we  consider  the  growth 
of  population.  "  The  most  decisive  mark  of  the  prospeiity 
of  any  country  is  the  increase  of  the  number  of  its  inhab- 
itants" (Adam  Smith).  Even  in  modern  times  for  some 
purposes  this  mark  is  of  the  first  importance  in  national 
progress.  It  implies  greater  power  of  defence,  especially 
with  universal  conscription,  an  increase  of  the  combination 
2b 


370  ELEMENTS   OF   POLITICAL   ECONOMY 

and  division  of  labour,  and  improvements  in  the  means  of 
transport.  In  general,  an  actual  increase  of  numbers  shows 
also  that  the  positive  checks  (which  are  comprehensively 
included  under  the  term  misery^  are  not  keeping  down 
the  population,  that  there  is  no  undue  exercise  of  pru- 
dential restraint,  and  that  there  is  an  increase  in  the  con- 
suming powers  of  the  people  or  in  their  real  wages. 

On  the  other  hand,  in  estimating  progress  in  population, 
the  simple  quantitative  measurement  is  not  enough:  we 
may  have  an  increase  in  numbers  with  no  corresponding 
improvement  in  quality,  and  even  with  positive  degrada- 
tion. It  is  not  possible,  however,  to  obtain  any  simple 
test  of  improvements  in  quality.  The  only  plan  seems 
to  be  to  take  account  of  a  number  of  separate  factors. 
A  good  example  is  given  in  that  classic  work,  Porter's 
Progress  of  the  Nation^  which,  although  dealing  essen- 
tially with  economic  progress,  describes  the  progress  of 
the  nation  in  morals  and  manners,  not  from  any  ideal 
or  metaphysical  standpoint,  but  by  concrete  reference  to 
sports,  drinking,  theatres,  and  by  statistics  of  education, 
crime,  health,  average  life,  etc. 

Attempts  have  been  made  to  obtain  more  precise  modes 
of  estimating  the  progress  of  population,  apart  from  mere 
numbers.  One  of  the  oldest  methods  is  to  make  a  mone- 
tary valuation  of  the  people.  The  idea  is  exemplified  in 
ancient  legal  systems  in  which  every  person  and  every 
part  of  him  was  appraised  for  the  purposes  of  compen- 
sation ;  there  was  the  tvergild  for  the  life,  and  so  much 
less  for  particular  limbs  and  feelings  —  an  outrage  such  as 
shaving  the  head  in  derision  was  more  heavily  fined  than 
the  loss  of  a  limb.     At  the  present  day  damages  for  inju- 


THE  NATURE   OF  ECONOMIC   PROGRESS  371 

lies  of  this  kind,  material  and  sentimental,  are  constantly 
estimated.  We  have  only  to  extend  the  application  of  the 
principle  from  individuals  to  the  aggregate  to  obtain  an 
estimate  of  the  money  value  of  a  whole  population.  In 
making  such  a  valuation  we  may,  as  in  the  case  of  material 
capital,  apply  the  ideas  both  of  cost  of  produetion  and  of  earrv- 
ing  capacity.  It  has  often  been  observed  that  the  rearing 
and  education  of  children  involves  a  very  real  monetary 
cost,  and  estimates  have  been  made  at  different  times  of  the 
cost  of  production  of  the  finished  child.  Roughly,  we  may 
apply  the  maxim  that  the  greater  the  cost  the  greater  the 
value.  The  prohibition  of  work  to  children  under  a  certain 
age  increases  the  cost,  but  improves  the  quality.  If  the 
education  of  children  is  paid  for  out  of  the  rates  and  taxes, 
the  money  cost  is  none  the  less  real,  and  may  well  be 
greater.  As  we  ascend  in  the  social  scale,  so  much  higher 
becomes  the  cost  of  professional  training,  and  we  may  take 
account  of  the  capital  sunk  in  education  just  as  much  as 
of  that  sunk  in  land. 

But,  as  in  material  capital,  so  also  in  living  capital,  cost 
alone  does  not  determine  value :  we  must  take  account  also 
of  earning  capacity.  One  of  the  best  signs  of  material 
progress  is  the  increase  in  the  numbers  of  the  more  highly 
paid  forms  of  labour  compared  with  the  lower.  (See  be- 
low, Chap.  V.)  The  wages  of  a  nation  may  be  arranged 
in  a  series  from  the  lowest  unskilled  labour  up  to  the 
highest  professional  skill.  Population  remaining  the  same, 
progress  may  be  estimated  by  the  relative  distribution  in 
the  numbers  of  the  classes.  (A  striking  illustration  is 
afforded  by  Giffen's  essays  on  the  "  Progress  of  the  Work- 
ing Classes.") 


372  ELEMENTS   OF    POLITICAL   ECONOMY 

3.  Progress  and  Utility.  —  It  is  clear,  however,  that 
money  estimates,  whether  of  things  or  of  people,  can 
only  show  the  nature  of  the  progress  of  the  nation 
very  imperfectly.  We  must  go  behind  the  money  cost 
and  the  money  earnings  to  the  real  cost  and  the  real 
earnings. 

And  first  of  all  we  may  appl}^  the  ideas  of  utility  and 
disutility.  Under  ordinary  conditions  we  suppose  that  an 
increase  in  the  money  wealth  of  an  individual  means  to 
him  an  increase  of  utilit}^  (or  happiness),  even  supposing 
that  the  individual  is  obliged  to  earn  the  money.  We 
suppose  that  the  labour  of  acquisition  will  be  carried  to 
the  point  at  which  the  disutility  of  the  work  just  balances 
the  utility  of  the  gain.  The  same  ideas  may  be  applied  to 
a  nation.  It  may  be  supposed  that  every  increase  in  its 
money  wealth  shows  an  increase  in  the  aggregate  utility 
of  that  wealth.  Here,  however,  it  is  still  more  important 
to  distinguish  between  total  and  marginal  utility  or,  in  the 
older  pliraseology,  between  riclies  and  value.  (See  Ricar- 
do's  Principles,  Chap.  XX.) 

A  rise  in  the  aggregate  money  value  of  the  houses  may 
mean  improvements  in  size,  convenience,  sanitation,  etc. 
One  of  the  best  concrete  signs  of  progress  is  the  increase 
in  the  number  of  rooms  in  a  house  and  of  the  windows. 
But  sometimes  a  rise  in  money  value  may  point  to  a 
decrease  in  utility  to  the  nation,  e.g.  exhaustion  of  natural 
resources  with  greater  value  of  the  remainders,  monopolies, 
increase  of  taxation,  checks  on  foreign  trade,  etc. 

Conversely,  a  fall  in  price  may  point  to  an  increase  of 
utility,  e.g.  the  exploitation  of  new  sources  or  improve- 
ments in  production.     In  fact,  from  the  national  standpoint 


THE  NATURE  OF  ECONOMIC  PROGREbS  373 

it  seems  best  to  regard  an  increase  of  cheapness  as  meaning 
an  increase  of  utility  (the  root  idea  in  consumers'  rent). 
If  the  cheapness  is  due  to  better  natural  sources  of  supply, 
or  to  more  effective  methods  of  production,  this  is  no  doubt 
true ;  but  for  the  nation  there  is  the  danger  of  underestimat- 
ing in  some  cases  the  real  cost.  It  is  sometimes  best  and 
even  necessary  to  leave  out  money.  In  the  early  years 
of  the  factory  system  in  England  the  increased  cheapness  of 
the  product  was  small  compensation  for  the  disutility  of  the 
degraded  labour  of  the  children.  Exchange  often  conceals 
the  real  character  of  national  production.  It  is  true  that 
the  makers  of  cheap  goods  by  degraded  labour  provide 
themselves  with  necessaries,  and  to  them  the  utility  of  the 
money  earned  is  very  great ;  but  from  the  national  point  of 
view,  if  we  compare  the  disutility  involved  in  some  kind 
of  work  with  the  utility  of  the  cheap  product  to  the  con- 
sumers, there  may  be  a  large  balance  of  disutility.  We 
must  set  producers'  deficits  against  consumers''  surpluses. 
This  is  illustrated  in  the  most  striking  way  in  the  old 
systems  of  slave  production.  And  in  modern  times  it  is 
the  basis  of  factory  legislation  and  generally  of  the  regu- 
lation by  law  of  the  conditions  of  labour.  And  logically  the 
extension  of  the  principle  would  lead  up  to  the  prohibition 
of  certain  forms  of  cheap  labour,  even  at  the  cost  of  an 
extension  of  poor  relief. 

The  general  conclusion  of  this  application  of  the  ideas 
of  utility  and  disutility  to  progress  is  that  the  assistance 
given  by  them  is  formal  and  suggestive  rather  than  sub- 
stantial and  historical,  exactly  as  in  the  case  of  the  general 
theory  of  evolution.  Just  as  we  must  go  behind  the 
money  to  the  utilities  and  disutilities,  so  also  we  must  go 


374  ELEMENTS  OF  POLITICAL  ECONOMY 

behind  these  again  to  more  definite  mental  and  moral  ele- 
ments, such  as  those  indicated  above. 

4.  Progress  in  Production,  Exchange,  and  Distribution.  — 
Economic  progress  may  be  considered  from  the  standpoint 
of  the  great  departments,  into  which  political  economy  is 
divided  for  the  purpose  of  exposition.  Progress  in  pro- 
ductive power,  as  shown  by  the  increase  of  man's  power 
over  nature,  is  so  striking  and  so  continuous  that  it  needs 
no  illustration.  We  can  trace  from  the  earliest  beginnings 
the  development  of  agriculture,  mining,  weaving,  building, 
etc. 

Similarly  of  exchange,  which  logically  is  a  part  of  pro- 
duction. We  discover  the  same  continuity  and  progress 
in  the  means  of  transport  by  land  and  sea  and  in  the  ex- 
change of  products  by  trade.  Taking  a  broader  view,  one 
of  the  greatest  agencies  of  progress  has  been  the  commuta- 
tion of  payments  in  services  and  in  produce  into  money 
payments,  the  economic  form  of  progress  from  status  to 
contract.  The  history  of  commutation  is  one  of  the  prin- 
cipal strands  in  the  history  of  civilisation. 

At  present,  however,  it  is  perhaps  more  important  to 
notice  that  in  some  things  progress  has  consisted  more  in 
the  complete  or  partial  abolition  of  money  payments  and 
in  the  restraint  of  freedom  of  contract.  The  principle  of 
equality  before  the  law  was  only  accepted  with  great  diffi- 
culty in  the  most  progressive  nations,  and  on  the  economic 
side  this  means  that  justice  is  not  to  be  bought  or  sold. 
Even  under  present  conditions,  however,  this  ideal  is  only 
imperfectly  realised  on  account  of  the  costs  of  legal  advice. 

The  tendency  of  modern  times  has  been  to  make  a 
large  part  of  education  a  free  gift,  and  the  ideal  of  social- 


THE  NATURE  OF  ECONOMIC  PROGRESS         375 

ism  is  to  extend  the  forms  of  wealth,  both  material  and 
immaterial,  that  are  not  to  be  subject  to  exchange. 

In  production  and  exchange  in  the  last  resort  economic 
progress  consists  to  a  great  extent  in  the  economy  of  means 
to  ends,  the  desirability  of  the  various  ends  being  supposed 
to  be  given.  Progress  in  distribution,  however,  only  seems 
intelligible  when  it  is  estimated  according  to  some  ethical 
standard,  and  here  the  difficulty  is  that  there  is  no  general 
agreement  as  to  the  ultimate  test  that  ought  to  be  applied. 
Are  we  to  say,  for  example,  that  the  distribution  is  best 
which  leads  to  maximum  happiness,  or  is  more  stress  to  be 
laid  on  the  idea  of  freedom  or  self-realisation  ? 

In  this  conflict  of  fundamental  principles,  it  seems  best, 
for  economic  purposes,  to  stop  short  at  those  middle  axioms 
that  are  accepted  by  practically  all  systems  of  moral  phi- 
losophy that  attempt  to  give  precision  to  common  sense, 
thought,  and  practice.  When  we  take  a  broad  view,  we 
may  hope  to  discover  signs  of  progress  in  distribution  that 
will  be  generally  admitted,  just  as  we  can  discover  also 
signs  of  physical  health  that  are  generally  accepted  in 
spite  of  the  controversies  that  still  rage  on  fundamental 
principles  in  medicine. 

What  may  be  specially  termed  the  economic  principle  of 
distribution  (as  adopted  in  this  work)  may  be  reconciled 
with  any  system  of  moral  philosophy.  As  already  indi- 
cated in  the  second  book,  it  is  associated  with  or  founded 
on  the  organisation  and  conditions  requisite  or  conducive 
to  production :  economic  distribution  is  that  which  tends 
to  secure  maximum  efficiency  at  the  minimum  real  cost ;  to 
proportion  reward  to  effort;  to  secure  the  fruits  of  the 
productive   agents    to   their  creators    and   preservers ;   to 


376  ELEMENTS   OF   POLITICAL   ECONOMY 

extend  the  freedom  of  individuals,  and  to  further  the 
development  of  contract.  This  economic  principle  cannot 
be  indicated  in  any  simple  proposition  because  it  is  ap- 
plied in  different  ways  and  the  difference  becomes  more 
marked  with  the  increasing  complexity  of  the  productive 
organisation. 

As  in  the  case  of  other  complex  economic  conceptions  (e-g- 
equality  of  taxation)  it  may  be  made  more  clear  by  a  con- 
sideration of  the  opposite.  Negatively,  then,  the  economic 
principle  as  here  understood  is  opposed  to  distribution  by 
force  or  by  privilege  or  habit  or  unconscious  routine,  as 
exemplified  in  successive  systems  of  law  and  custom.  All 
that  is  involved  in  this  general  statement  can  only  be 
realised  by  the  study  of  economic  history.  If  we  take  a 
rapid  survey  of  the  salient  features  of  the  distribution  of 
wealth  in  England  at  different  periods,  we  observe  through 
the  ages  that  the  economic  principle  becomes  more  and 
more  the  dominating  purpose.  In  the  Roman  occupation 
distribution  rested  on  slavery  and  extortionate  taxation  ; 
in  the  Saxon  economy  the  possession  of  land  gave  the 
command  over  labour;  but  from  the  Norman  Conquest 
throughout  the  medieeval  period  the  force  of  this  economic 
principle  reduced  more  and  more  the  privileges  of  the 
crown,  the  nobility,  and  the  church ;  it  weakened  the 
power  of  the  landholders  over  the  serfs,  and  at  the  end  of 
the  period  it  broke  down  the  monopolies  of  gilds  and 
corpoi-ations.  The  destruction  of  privilege  was  not  com- 
plete, and  al)uses  destroyed  in  one  form  reappeared  in 
other  forms.  The  great  work  of  Adam  Smith  on  the 
negative  side  was  to  shatter  the  survivals  of  the  old  ideas 
of  distribution,  and  on  the  positive  side  to  show  the  benefits 


THE  NATURE   OF   ECONOMIC   PROGRESS  377 

of  the  adoption  of  the  economic  principle.  In  modern 
times,  and  notably  in  the  nineteenth  century,  the  ideal  — 
"to  each  the  product  of  his  own  labour"  —  has  been  set 
up  by  those  who  differ  greatly  as  to  its  real  meaning.  But 
this  uncertainty  of  interpretation  does  not  weaken,  and 
perhaps  indeed  strengthens  its  destructive  power;  it  is 
easy  to  see  that  some  privilege  or  monopoly  or  institution 
conflicts  with  this  ideal,  though  there  is  a  divergence  of 
view  as  to  the  best  substitution. ^ 

1  The  whole  of  Book  IV  is  much  more  fully  dealt  with  in  the  Principles 
than  was  possible  in  this  summary.  Throughout  this  book  it  is  necessary 
to  refer  to  economic  history,  and  the  student  should  not  be  content  with 
mere  summaries.  Cunningham's  Groioth  of  English  Industry  and  Com- 
merce contains  a  mass  of  detail  and  has  the  advantage  of  being  written 
■without  preconceived  ideas  ;  Seebohm's  English  Village  Community  is  an 
admirable  study  of  one  most  important  side  of  economic  progress  ;  Ash- 
ley's Economic  History  should  be  read  with  Seebohm ;  for  general  pur- 
poses the  third  book  of  Adam  Smith  may  be  contrasted  with  the  fourth 
book  of  Mill,  to  the  manifest  advantage  of  the  former ;  the  works  of  Loria, 
especially  the  Economic  Bases  of  the  Social  Constitution,  though  they 
exaggerate  the  material  side  of  history,  are  most  suggestive  and  supple- 
ment the  ordinary  view ;  the  best  account  of  the  idea  of  progress  is  in 
Flint's  Philosophy  of  History ;  Pareto  has  carried  to  an  extreme  the 
application  of  the  theory  of  evolution  and  the  analogies  of  biology  ;  of 
German  works  the  first  volume  of  Wagner  is  best  adapted  for  general 
purposes.  For  the  history  of  the  theory  of  economic  interpretation  see 
Seligman's  Economic  Interpretation  of  History. 


CHAPTER   II 

PROGRESS   IN  MONEY   AND  PRICES 

1.  Progress  and  Money.  —  As  already  shown,  one  of 
the  most  distinctive  signs  of  economic  progress  is  the 
continuous  extension  of  the  use  of  money  both  for  valua- 
tion and  for  exchange.  The  principle  of  commutation, 
however,  can  only  operate  by  a  corresponding  develop- 
ment of  the  mechanism  of  money,  and  of  the  monetary 
functions.  Indirectly  the  history  of  money  throws  great 
light  on  other  departments  of  economic  progress.  Even 
in  biology  there  is  nothing  more  striking  than  the  develop- 
ment of  the  modern  banking  system  from  the  primitive 
forms  of  barter.  The  salient  points  in  the  history  of 
metallic  money  in  England  are  summarised  in  this  sec- 
tion, as  history  without  detail  is  only  another  form  of 
theory. 

From  1066  to  the  great  recoinage  of  silver  in  1696 
the  real  standard  was  silver,  and  except  during  the  Tudor 
debasement  (1543-1552)  the  ancient  fineness  was  undis- 
turbed. The  standard  measure  was  the  pound  of  silver 
(which  as  explained  before  had  taken  the  place  of  the 
man  slave),  and  it  was  coined  always  into  240  pennies. 
At  first,  only  foreign  gold  coins  were  used,  but  in  the 
middle  of  the  thirteenth  century,  "an  age  of  revolution 
and  new  ideas  all  over  the  world,"  a  native  gold  coinage 
was  adopted  almost  simultaneously  by  all  the  nations  of 

378 


PROGRESS  IN  MONEY  AND  PRICES  379 

Europe,  and  the  king  of  England  struck  gold  pennies  ;  but 
the  gold  coinage  was  rather  a  sign  than  a  reality  till  the 
celebrated  nohle  of  1344.  This  beautiful  coin  was  about 
one-fifth  heavier  than  our  present  sovereign.  It  is  remark- 
able how  many  events,  apparently  disconnected,  combined 
to  emphasise  the  transition  from  the  media3val  to  the 
modern  period.  The  sovereign  was  first  coined  by 
Henry  VII  in  1489,  and  was  about  double  the  present 
weight. 

From  the  first  issue  of  gold  coins  they  were  used  as 
equivalent  to  varying  amounts  of  silver.  A  ratio  was 
generally  fixed  by  royal  proclamation ;  and  as  the  market 
ratio  was  constantly  differing  from  the  legal  ratio,  there 
were  abundant  illustrations  of  the  fact  that  a  double 
standard  is  an  alternating  standard. 

The  difficulty  in  fixing  the  ratio  was  increased  by  the 
progressive  fall  in  the  weight  of  the  silver  penny,  and 
the  ratio  was  of  course  fixed  only  in  reference  to  the  ex- 
change of  coins  —  so  many  silver  pennies  for  the  gold 
penny  was  the  form  of  the  first  proclamation.  The  pro- 
gressive fall  in  the  weight  of  the  silver  penny  may  be 
accounted  for  by  the  wear  and  tear  of  the  coins,  the  de 
facto  fall  in  weight  of  the  actual  currency  being  recog- 
nised by  the  king;  the  process  of  this  natural  degrada- 
tion in  weight  was  intensified  by  the  use  of  worse  foreign 
coins,  and  after  gold  was  used,  there  was  the  operation  of 
Gresham's  law.  As  a  result,  the  silver  penny  fell  from 
22|-  grains  at  the  Conquest  to  7^  in  the  reign  of  Elizabeth. 
In  1694  the  silver  coins  in  circulation  had  become  so 
clipped  and  worn  that  the  guineas  nominally  worth  only 
208.  were  generally  accepted  for  30s. 


380  ELEMENTS   OF   POLITICAL   ECONOMY 

In  1696  the  silver  coinage  was  restored  at  a  cost  of 
over  three  millions  sterling,  and  in  a  few  years  was  dis- 
placed from  circulation  by  the  overvalued  gold  coin. 
The  effect  of  this  overvaluation  was  the  adoption  (even- 
tually) of  the  gold  standard  (1816).  The  adoption  by 
England  of  the  gold  standard  was  the  result  of  a  series 
of  historical  accidents  as  regards  the  particular  year  and 
the  particular  weight  of  the  sovereign.  At  the  same  time, 
however,  in  the  light  of  subsequent  history,  it  may  be  said 
to  accord  with  the  natural  development  of  trade  and 
commerce.  International  bimetallism  is  theoretically 
possible,  and  might  have  been  advantageous  if  obtained 
without  disturbance  ;  but  national  bimetallism,  as  the 
history  of  England  shows,  is  unstable  and  inconvenient. 

2.  Progress  and  General  Prices.  —  There  are  continuous 
records  for  six  centuries,  both  in  England  and  in  France, 
thanks  to  the  labours  of  Rogers  and  Vicomte  d'Avenel, 
respectively ;  and  a  survey  reveals  that  there  are  move- 
ments in  general  prices,  as  well  as  great  changes  in  par- 
ticular relative  prices. 

With  regard  to  general  prices,  it  is  evident  from  the 
quantity  theory  of  money  in  its  extended  form,  Avhich 
takes  account  of  many  other  causes  besides  the  actual 
quantity  of  metallic  money,  that  it  is  a  matter  of  difficulty 
to  assign  the  true  causes  to  the  actual  movements  that 
have  taken  place ;  and  there  is  also  a  preliminary  diffi- 
culty. Although  from  the  Conquest  downward,  prices 
have  been  expressed  in  England  in  terms  of  pounds,  shil- 
lings, and  pence  (X  s.  d.  being  the  first  letters  of  Uby-a, 
solidus,  denarius^,  the  pound  being  the  standard  unit,  and 
the  shillings  and  pence  definite  submultiples,  the  metallic 


PROCiliK.SS   IN  MONEY   AND   TUICKS  381 

meaning  of  the  pound  itself  and  of  the  divisions  of  it  has 
changed  (see  last  section).  We  find  also  that  at  differ- 
ent times  the  actual  currency  has  been  different  from  the 
legal  weiglit  of  the  time,  and  that  sometimes  the  fact  has 
been  recognised  and  sometimes  not.  It  might,  then,  be 
thought  that  the  best  plan  would  be  simpl}'  to  reduce  the 
prices  in  all  cases  to  the  corresponding  weights  of  silver, 
so  long  as  silver  was  the  standard.  Such  a  procedure, 
however,  implies  that  general  prices  move  exactly  in 
response  to  changes  in  the  weights  of  the  standard  coins. 
But  such  an  exact  correspondence  would  only  be  effected 
under  the  assumptions  that  the  quantity  of  money  was 
increased  exactly  in  proportion  to  the  diminution  in 
weight,  and  that  the  quantity  of  the  metallic  money  was 
the  only  factor  that  need  be  taken  into  account.  Such 
a  simple  view  of  the  movements  in  the  value  of  money 
would  only  be  adequate  under  the  simplest  hypothetical 
conditions.  And  it  is  indeed  remarkable  that  Rogers,  who 
made  most  violent  attacks  on  the  abstract  method,  should 
himself  have  used  that  method  without  the  precautions  that 
are  necessary.  It  is  worth  while  making  a  brief  reference 
to  the  sigfniiicant  facts.  From  1260  to  1540  the  weight  of 
the  silver  penny  fell  from  22|  grains  to  10|-  grains  ;  that  is 
to  say,  a  pound  of  silver  at  the  latter  date  would  have  made 
more  than  twice  as  many  pennies  as  at  the  former  (the  silver 
penny  being  the  principal  coin  throughout).  If,  then, 
general  prices  had  moved  in  response  to  changes  in  the 
weight  of  the  penny,  which  was  the  standard  coin,  they 
would,  on  the  average,  have  more  than  doubled ;  and  if  we 
could  take  wheat  as  representative,  wheat  would  so  far 
have  more  than  doubled  in  price,  having  regard  only  to 


382  ELEMENTS  OF  POLITICAL  ECONOMY 

the  causes  affecting  prices  in  generaL  But  instead  of  any- 
such  upward  movement,  on  the  whole,  prices  were  steady, 
and  wheat  throughout  oscillated  about  six  shillings  the 
quarter.  In  order  to  make  his  prices  square  with  the 
simple  theory  which  he  tacitly  assumes,  Rogers  supposes 
that  people  actually  made  their  bargains,  not  in  currency, 
but  in  weights  of  silver,  and  that  the  penny  that  is  quoted 
means  an  actual  penny  weight,  according  to  the  old  stand- 
ard. This  opinion  of  Rogers  has  not  been  generally 
indorsed,  and,  on  the  contrary,  has  been  distinctly  con- 
troverted (^e.g.  by  Cunningham  and  Seebohm),  and  it  is 
only  mentioned  here  to  indicate  the  difficulty  there  is  in 
dealing  with  general  prices. 

The  stability  of  prices  through  the  mediaeval  period  is  to 
to  be  explained  only  on  the  supposition  that  there  was,  on  the 
whole,  a  comijensatory  action  of  the  varied  causes  at  work. 
The  fall  in  the  weight  of  the  penny  so  far  counteracted  the 
scarcity  of  silver  as  regards  production  from  the  mines ; 
greater  rapidity  of  circulation  and  improved  markets  so  far 
compensated  the  increased  volume  of  trade,  etc. ;  but  this 
stability,  which  is  too  readily  ascribed  to  custom,  was  liable  to 
be  destroyed  as  soon  as  any  one  factor  became  of  dominant 
importance.  Thus  the  issues  of  base  money  by  Henry 
VII  I,  and  later  the  discoveries  of  silver,  so  increased  the 
quantity  of  money  that  prices  rose  to  a  permanently  higher 
level. 

As  regards  the  connection  of  movements  in  general 
prices  with  economic  progress,  it  does  not  appear  that  any 
causal  connection  can  be  established.  No  doubt  if  the 
rise  in  prices  is  due  to  a  fluctuating  depreciation  or  de- 
basement of  the  standard,  it  so  far  is  a  hindrance  to  trade 


PROGRESS  IN  MONEY  AND  PRICES  383 

through  the  uncertainty  imparted  to  contracts.  But  tak- 
ing the  great  movements  in  the  value  of  the  standard,  first 
silver  and  then  gold,  it  seems  that  the  gradual  break-up 
of  the  mediaeval  system  was  associated  with  a  gradual 
appreciation  of  the  metal  silver,  although  prices  remained 
comparatively  stable  as  just  explained;  the  transition 
from  the  mediaeval  to  the  modern  period  was  associated 
with  a  rise  in  prices  (and  a  fall  in  the  value  of  silver) ; 
but  it  is  clear  that  the  influence  of  the  rise  in  prices  was 
small  relatively  to  such  causes  as  the  discovery  of  Amer- 
ica, the  Reformation,  the  break-up  of  feudalism,  the 
growth  of  manufactures,  the  invention  of  printing,  etc. 
In  the  nineteenth  century  in  England  we  have  progress 
in  some  directions  coincident  with  retrogression  in  others, 
the  progress  being  on  the  whole  less  marked  in  the  depre- 
ciation of  the  first  years  of  the  century  than  in  the  appre- 
ciation of  the  second  quarter;  whilst  that  of  the  third 
quarter  with  its  high  level  of  prices  is  less  than  that  of 
the  fourth  with  its  low  level.  The  balance  of  progress 
on  the  whole,  during  the  century,  is  remarkable ;  but  it  is 
doubtful  if  it  can  be  definitely  ascribed  even  in  part  either 
to  appreciation  or  depreciation  considered  by  itself.  And 
such  a  result  coincides  with  what  might  be  expected  on 
theoretical  grounds. 

3.  Progress  and  Relative  Prices.  —  "From  the  high  or 
low  price  of  some  sorts  of  goods  in  proportion  to  that  of 
others  in  any  country  at  any  time  we  can  infer  with  a 
degree  of  probability  that  approaches  almost  to  certainty, 
that  it  was  rich  or  poor,  that  the  greater  part  of  its  lands 
were  improved  or  unimproved,  and  that  it  was  in  a  more 
or  less  barbarous  state,  or  in  a  more  or  less  civilised  one  " 


384  ELEMENTS   OF   POLITICAL   ECONOMY 

{Wealth  of  Nations,  Book  I,  Chap.  XI).  Adam  Smith  him- 
self gives  some  remarkable  illustrations  of  tlie  truth  of  this 
dictum,  and  with  the  greater  abundance  of  material  now- 
available  and  the  greater  prominence  given  to  economic 
elements  in  general  history,  this  mode  of  estimating  and 
illustrating  progress  ought  to  become  much  more  fruitful. 
The  history  of  relative  prices  shows  the  complexity  of 
economic  conditions  even  in  j)eriods  which  we  are  accus- 
tomed to  regard  as  primitive ;  it  shows  also  that  there  is 
much  more  movement  in  prices  than  we  are  accustomed 
to  associate  with  the  supposed  customary  prices  of  the 
mediaeval  period.  Even  a  glance  through  the  volumes 
of  Rogers  is  instructive  on  these  two  points.  We  find 
in  the  history  of  prices,  in  some  cases,  a  remarkable  fixity 
of  ratios  of  values  over  long  periods  in  spite  of  great  oscil- 
lations, owing  to  temporary  variations  in  demand  and  sup- 
ply. Thus,  for  example,  the  average  price  of  wheat  from 
1260  to  1400  was  5s.  10|c?.  per  quarter,  and  that  of 
barley  4s.  3|(7.  per  quarter,  a  ratio  of  about  100  to  73 ;  but 
wheat  fluctuated  between  the  limits  roughly  of  15s.  and 
3s.,  and  barley  between  13s.  and  2s.,  and  the  ratios  varied 
between  100  to  88  and  100  to  55  in  different  years.  The 
great  rise  in  general  prices  from  1540  to  1582  did  not 
disturb  appreciably  the  ratio,  but  from  that  period  there 
were  remarkable  changes  down  to  the  present  time,  the 
ratio  having  fallen  to  100  to  54  in  the  seventeenth  and 
eighteenth  centuries,  and  risen  to  100  to  100  at  the  end  of 
the  nineteenth. 

The  liistory  of  relative  prices  is  also  the  history,  to  a 
great  extent,  of  the  principle  of  substitution.  We  have 
a  remarkable  series  of  substitutions,  both  as  regards  con- 


PROGRESS  IN   MONEY  AND  PRICES  885 

sumption  and  production.  Even  as  regards  the  primary- 
wants,  where  habit  is  strongest,  there  is  a  tendency  to  sub- 
stitute the  cheaper  for  the  more  expensive  modes  of  satis- 
faction, e.g.  in  food,  drink,  clothes,  fuel,  etc.,  although  for 
a  long  time,  custom  or  fashion  or  ignorance  may  retard 
the  process.  In  luxuries,  in  which  fashion  often  rather 
favours  novelties,  the  effect  of  cheapness  is  still  more 
marked. 

One  or  two  other  examples  may  be  given  from  the  history 
of  relative  prices  in  England.  From  1260  to  1400,  weight 
for  weight,  beef  was  twice  as  valuable  as  wheat ;  in  the  last 
years  of  the  nineteenth  century  it  was  about  six  times  as 
valuable.  With  oscillations  the  rise  in  the  value  of  meat 
has  been  continuous.  The  explanation  depends  partly 
on  the  conditions  affecting  consumption ;  the  increase  in 
the  wealth  of  the  people  generally  has  increased  the 
demand  for  beef,  especially  of  recent  years.  But  in  the 
early  periods  beef  was  relatively  cheap,  partly  because  it 
was  impossible  to  keep  much  stock  through  the  winter 
in  the  absence  of  roots,  etc.,  so  that  for  a  time  there  was 
relative  abundance,  and  after  that  time  there  were  no 
sales.  Again,  as  regards  production,  wheat  was  very 
costly,  the  yield  being  only  six  to  eight  bushels  per  acre, 
that  is,  not  a  quarter  of  the  present  yield.  The  high 
price  of  candles  and  the  low  price  of  leather  are  con- 
nected by  the  fact  that  the  cattle  were  lean  and  the 
mortality  (and  yield  of  skins)  was  high.  There  was 
also  a  demand  for  candles  for  church  offerings  which  had 
a  very  real  meaning  at  a  time  when  artificial  light  was  so 
dear.  One  of  the  greatest  benefits  of  recent  years  has 
been  the  introduction  of  cheap  mineral  oil.  The  substitu- 
2c 


386  ELEMENTS  OF  POLITICAL  ECONOMY 

tion  of  cotton  for  wool,  of  coal  for  charcoal,  of  transport 
by  canals  for  transport  by  road,  and  then  of  transport  by 
railways  for  canals,  are  all  examples  of  substitution  that 
were  proximately  associated  with  movements  in  relative 
prices.^ 

iThis  chapter  is  greatly  abbreviated  from  Book  IV,  Chaps.  Ill- VI 
inclusive  in  the  Principles.  The  History  of  Agriculture  and  Prices,  by 
Thorold  Rogers,  which  has  just  been  completed  by  the  addition  of  two  sup- 
plementary volumes,  is  a  storehouse  of  facts,  but  it  must  be  used  with 
caution.  Tooke  and  Newmarch's  History  of  Prices  and  Porter's  Progress 
of  the  Nation  give  materials  for  the  first  half  of  the  nineteenth  century. 
See  also  L.  L.  Price's  Money  and  its  Relations  to  Prices. 


CHAPTER   III 

KENT    AND    PROGRESS 

1.  Rent  as  a  Measure  of  Progress. — It  was  a  favourite 
doctrine  with  the  economists  of  the  seventeenth  century 
(^e.g.  Petty)  that  a  high  rent  was  the  best  sign  of  pros- 
perity, and  that  a  rise  in  rent  was  a  national  benefit  and 
a  fall  in  rent  an  evil.  From  this  standpoint  it  seemed 
easy  to  infer  that  whatever  raised  rents  was  beneficial, 
and  whatever  lowered  rents  was  the  reverse.  In  the  middle 
of  the  eighteenth  century  the  author  of  the  Memoirs  of 
Wool^  even  now  a  valuable  work  of  reference,  takes  it  for 
granted  that  a  fall  in  rent  is  a  national  calamity.  Accord- 
ingly he  thinks  that  the  policy  of  prohibiting  the  export 
of  wool  was  to  be  condemned,  because  it  lowered  the  price, 
and  in  that  way  lowered  rents.  "  As  the  landed  interest  is 
the  most  considerable  national  interest,  so  that  of  pasture 
ground  is  the  most  considerable  of  the  landed,  and  wool 
the  principal  article  for  the  support  of  both."  Rents 
came  to  be  regarded  as  the  principal  source  of  the  demand 
for  commodities ;  if  rents  fell,  the  landlord  could  not  pay 
the  shopkeeper,  the  shopkeeper  could  not  pay  the  whole- 
sale merchant,  the  merchant  could  not  pay  the  manu- 
facturer, "by  which  means  the  mischief  circulates,"  and 
one  deficiency  extends  itself  to  an  inconceivable  length 
and  produces  many. 

387 


388  ELEMENTS   OF   POLITICAL   ECONOMY 

The  bounty  on  corn  was  intended  primarily  to  raise 
rents,  and  protection  to  the  landed  interest  remained 
one  of  the  chief  objects  of  English  commercial  policy 
until  the  repeal  of  the  Corn  Laws.  From  that  time, 
largely  owing  to  the  influence  of  Mill,  the  increase  of 
rent  came  to  be  regarded  popularly  as  an  evil,  although 
the  natural  and  necessary  concomitant  of  industrial  prog- 
ress under  present  conditions,  an  opinion  which  was 
pushed  to  its  logical  extreme  in  Henry  George's  Progress 
and  Poverty.  In  this  work  we  have  the  exact  opposite  of 
the  old  seventeenth-century  doctrine.  The  landlords  absorb 
by  their  rents  the  wealth  wliich  ought  to  go  to  the  poor ; 
thus  rent  is  the  cause  of  poverty ;  the  landlords  gain 
and  "  the  mischief  circulates." 

The  truth  is  that,  as  already  shown  (Book  II,  Chap.  X), 
the  terra  rent  covers  several  totally  distinct  conceptions, 
and  a  rise  in  rent  may  or  not  be  a  sign  of  progress  accord- 
ing to  its  nature  and  causes. 

2.  Progress  and  Urban  Rents.  —  It  may  be  shown  by 
reference  to  economic  history  that  a  rise  in  the  rental  of  land, 
even  in  and  near  a  large  city,  is  by  no  means  inevitable  or 
continuous,  although  under  certain  conditions  the  rise  may 
be  enormous.  At  first  the  value  of  suburban  land  depends 
on  agricultural  conditions,  and  the  subsequent  increase  in 
value  is  explained  by  the  limitation  of  the  supply  acces- 
sible for  building,  the  rise  in  demand,  and  the  failure  of 
substitutes  or  alternatives.  The  principal  element  in  the 
rent  in  this  case  is  the  scarcity  of  the  land.  This  scarcity 
is  sometimes  mistaken  for  or  at  any  rate  misnamed  mo- 
nopoly. There  may  be,  on  the  average,  some  degree  of 
monopoly,    that   is,    the    individual    landowners   have   as 


KENT  AND  PROGRESS  389 

regards  the  lessees  of  the  kind  a  commanding  position  in 
making  a  bargain ;  but  there  is  no  effective  combination, 
and,  on  the  other  hand,  there  is  effective  competition. 

It  is  possible  that  in  the  near  future  there  may  be  some 
fall  in  ground  rents  in  the  cities  of  old  and  fully  peopled 
countries.  The  natural  scarcity  of  the  land  from  the  point 
of  view  of  accessibility  may  be  counteracted  in  two  ways : 
first  by  raising  the  height  of  the  buildings  with  modern 
appliances  of  lifts,  etc.  (the  "  sky-scrapers  "  of  America), 
and  secondly,  by  the  improvement  in  the  means  of  trans- 
port and  of  access.  Even  now  one  of  the  chief  causes  of 
overcrowding  and  of  high  rents  in  the  cities  is  simply  the 
prejudice  of  the  working  classes  and  the  nature  of  their 
amusements.  In  time,  however,  the  better  accommodation 
at  the  outskirts  and  the  lower  rents  must  have  an  effect 
on  the  rents  of  the  centre.  The  middle  classes  have  long 
since  migrated  to  the  suburbs.  The  same  causes  apply, 
though  in  a  less  degree,  to  business  premises.  In  this  case, 
as  a  rule,  the  high  rent  does  not  mean  a  deduction  from 
profits,  but  an  equalisation  of  opportunities  of  profit. 

3.  Progress  and  Agricultural  Rents.  —  In  tracing  the 
progress  of  agricultural  rents  from  the  earliest  times  we 
must  remember  that  rents  were  for  a  long  period  paid  in  ser- 
vices and  in  produce.  If  we  were  to  place  a  value  on  these 
labour  and  produce  rents,  we  should  find  that  the  farther 
we  go  back,  the  more  onerous  they  were.  This  is  the  cen- 
tral idea  in  Mr.  Seebohm's  great  argument.  In  the  old 
manorial  system,  which  had  been  fully  developed  in  Saxon 
times,  the  owner  of  the  land  was  in  effect  the  owner  of  the 
labour  stationed  on  it ;  if  a  manor  was  sold  or  bequeathed, 
the  serfs  went  with  the  land  just  as  at  a  later  date  the 


390  ELEMENTS  OF  POLITICAL  ECONOMY 

"  souls  "  on  the  Russian  estate.  Each  landowner  had  the 
most  effective  of  all  monopolies  as  against  his  tenants ;  he 
could  take  everything  beyond  what  was  necessary  to  keep 
up  the  supply  of  his  living  capital.  Even  in  the  reign  of 
Edward  I  the  writer  of  a  landlord's  vade  mecum  directs 
that  inquiry  should  be  made  as  regards  the  villein  tenants 
"  to  what  amount  they  can  be  tallaged  without  reducing 
them  to  poverty  and  ruin."  The  first  great  result  of 
economic  progress  as  regards  rents  of  this  kind  was  their 
diminution.  The  second  great  result,  closely  associated 
with  the  first,  was  their  commutation  into  money  pay- 
ments. The  commutation,  on  the  whole,  proved  to  be 
in  favour  of  the  tenant,  as  the  landlords  found  to  their 
chagrin  after  the  Black  Death  ;  the  attempt  to  bring  back 
the  old  powers  of  the  landlord  was  one  of  the  causes  of  the 
peasant  revolt,  and  when  this  attempt  failed  the  landlords 
found  their  remedy  in  enclosures  and  sheep  farms.  In  this 
latter  case  they  strained  the  letter  of  the  law  and  over- 
rode the  customs  that  had  grown  up  in  favour  of  the 
tenants.  The  relation  of  the  landlord  to  the  tenant  was 
still  that  of  the  economic  superior,  even  in  the  seventeenth 
century,  and  complaints  are  common  of  the  injury  to 
agriculture  through  the  want  of  security  to  the  tenant. 
Rogers,  indeed,  asserts  that  at  this  time  in  England  some- 
thing very  like  the  Irish  cottier  system  prevailed,  in  which 
the  landlord  takes  all  except  a  minimum  of  necessaries 
left  to  the  tenant.  In  the  eighteenth  century  the  most 
noticeable  feature  is  the  progress  of  true  competition  rents. 
Those  who  rent  land  and  farm  with  the  new  improvements 
can  pay  higher  rents  out  of  a  real  surplus  than  the  old- 
fashioned  cultivators  can  pay  out  of  their  whole  earnings. 


RENT  AND  PROGRESS  391 

During  the  period  of  the  great  war  the  owners  of  land  were 
in  a  favourable  position,  owing  to  the  great  rise  in  prices 
partly  due  to  protection  but  much  more  to  a  series  of  bad 
seasons.  With  the  repeal  of  the  Corn  Laws  and  the  improve- 
ment of  the  laws  affecting  the  relations  of  landlord  and 
tenant,  the  end  of  the  nineteenth  century  has  witnessed  the 
full  effects  of  competition  in  the  widest  sense  on  agricul- 
tural rents.  The  landowner  has  been  deprived  by  law  of 
the  remnants  of  his  legal  superiority  in  making  bargains, 
and  of  his  economic  superiority  by  free  trade  and  the  great 
improvements  in  the  means  of  transport.  In  the  main,  the 
agricultural  rental  of  England  is  now  paid  out  of  the  sur- 
plus profits  earned  by  the  particular  portions  concerned. 
The  development  of  transport  and  foreign  trade  has  in 
effect  made  land  "free  "  :  in  the  sense  that  the  elements  of 
monopoly  or  the  rights  of  private  taxation  which  the  land- 
owners enjoyed  for  centuries  have  been  destroyed,  rent  is 
paid  only  for  superior  natural  advantages,  and  such  a  pay- 
ment inflicts  no  real  burden  on  the  payer.  It  is  well 
known  that  under  purely  economic  influences  the  agricul- 
tural rentals  of  England  have  fallen  as  much  as  the  rents 
in  Ireland  have  been  lowered  by  judicial  intervention.  In 
some  cases,  indeed,  the  economic  rent  has  become  negative, 
and  the  owner  of  the  land,  in  order  to  obtain  part  of 
the  profit-rent  for  his  buildings,  drains,  etc.,  has  been 
obliged  to  surrender  more  than  the  rent  formerly  ob- 
tained for  the  original  and  indestructible  powers  of  the 
soil. 

4.  The  Effects  of  Improvements  on  Agricultural  Rents. 
—  In  considering  the  effects  of  improvements  on  rent, 
owing  to  the  complexity  of  the  subject,  it  is  necessary  to 


392  ELEMENTS   OF   POLITICAL   ECONOMY 

adopt,  in  the  first  place,  the  deductive  or  abstract  method. 
Accordingly,  the  theory  of  economic  rent,  as  given  in  the 
second  book,  will  be  taken  for  granted,  together  with  the 
assumptions  as  regards  an  isolated  country,  etc.,  requisite 
to  make  it  true.  The  improvements  must  be  supposed 
to  be  general,  and  we  have  to  take  first  the  immediate 
effects.  The  improvements  may  be  of  different  kinds. 
The  principal  effect  of  improvements  in  transport  is  the 
substitution  of  superior  land  for  land  inferior  in  produc- 
tive power.  The  improvements  so  far  counteract  infe- 
riority of  situation.  Thus  the  margin  recedes,  produce- 
rents  fall,  and  rents  measured  in  money  fall  still  more. 
Similarly,  also,  the  improvements  in  transport  will  enable 
the  better  lands  to  be  cultivated  to  a  higher  pitch,  and 
the  marginal  cost  on  all  lands  will  diminish  with  the  fall 
in  the  expense  of  obtaining  materials  and  of  marketing 
the  produce.  And  thus  again  rents  fall.  Auj  improve- 
ments that  enable  the  same  amount  of  produce  to  be 
raised  from  less  land  Qe.g.  improved  rotation  of  crops),  or 
that  enable  the  same  amount  of  land  to  raise  the  same 
supply  at  less  marginal  cost,  have  the  same  effects,  namely, 
a  fall  in  money  rents.  There  are  certain  difficulties  in 
working  out  the  effects  of  improvements  on  rents  which 
can  only  be  surmounted  by  the  aid  of  mathematics  (see 
Marshall,  Principles,  Book  VI,  Chap.  IX,  note  on  Ricardo's 
theory  of  rent),  but  the  general  effect  may  be  made  clear 
by  one  consideration  of  a  general  character.  Suppose 
iliat  owing  to  improvements  less  capital  is  required  on 
each  portion  of  land  to  obtain  the  same  produce,  and  sup- 
pose that  the  rate  of  profit  remains  the  same.  Since 
economic  rent  is  the  sum  of  the  differential  profits,  if  in 


RENT   AND   PROGRESS  393 

each  case  there  is  less  capital,  in  each  case  also  there  is 
less  profits,  and  the  sum  of  the  differences  is  less. 

It  is  generally  argued,  as  by  Ricardo,  that  although  the 
immediate  effect  is  to  lower  rents,  the  ultimate  effect  of 
improvements  will  be  to  raise  rents.  The  reason  given 
is  that  there  will  be  an  increase  of  population  which  will 
again  push  out  the  margin  so  that  in  the  end  rents  will 
rise  beyond  their  former  level.  It  is  to  be  observed,  liow- 
ever,  that  the  increase  of  population  is  by  no  means  so 
certain  as  was  once  supposed,  and  in  old  countries  the 
growth  of  their  population  seems  unlikely  to  counteract 
to  any  extent  the  improvements  in  transport  as  regards 
the  great  food  staples.  There  may,  however,  be  some 
compensating  effects  to  the  owners  of  the  land  by  the 
use  of  the  land  for  other  purposes,  which  will  be  encour- 
aged by  the  increase  in  the  general  wealth  of  the  nation. 
Thus  land  becomes  more  valuable  for  its  sporting  rights, 
and  for  special  forms  of  produce  that  will  not  bear  the 
expense  of  transport  or  will  suffer  in  quality. 

The  effects  of  agricultural  improvements  on  rents,  as 
worked  out  on  the  pure  theory  with  an  isolated  country, 
generally  seem  paradoxical  and  somewhat  unreal,  even 
with  the  most  careful  explanation.  It  is,  then,  worth 
pointing  out  that  we  can  obtain  an  exact  illustration 
and,  indeed,  a  confirmation  of  the  theory  if  we  consider  the 
effects  of  changes  in  the  seasons.  A  series  of  good  seasons 
is  exactly  equivalent  to  a  series  of  general  improvements  in 
production.  The  effect  is  still  more  noticeable  if  we  take 
a  period  of  good  seasons  after  a  period  of  lean  years.  It 
may  be  remarked  that  the  popular  idea  that  nineteen  years 
(a  complete  cycle  of  the  moon)  is  sufficient  to  give  an 


394  ELEMENTS   OF   POLITICAL   ECONOMY 

average  of  seasons  is  fallacious,  and  probably  at  least  a 
hundred  years  would  be  required.  Before  the  repeal  of 
the  Corn  Laws,  England  was  practically  dependent  on  its 
own  food  supplies,  and  the  determining  factor  in  the  price 
of  corn  was  the  course  of  the  seasons.  It  was  a  matter  of 
common  knowledge  that  with  a  series  of  good  years  rents 
fell.  From  1715  to  1765  there  was  a  marked  exemption 
of  seasons  of  scarcity  as  compared  with  the  fifty  years 
before.  As  a  consequence,  provisions  were  cheap  and 
abundant,  and  the  general  condition  of  the  people  was 
greatly  improved.  But  we  read  at  the  same  time  of 
great  agricultural  distress  which  really  meant  a  fall  in 
rents.  Indeed,  many  of  the  pamphlets  of  the  time,  in 
accordance  with  the  ideas  then  dominant,  tried  to  show 
that  this  fall  in  rents  was  a  national  calamity,  "since 
the  flourishing  condition  of  the  landed  interest  supports 
all  trade."  Exactly  the  opposite  was  witnessed  in  the 
great  war.^ 

1  This  chapter  is  much  abbreviated  from  Principles,  Book  IV,  Chap.  V. 
For  the  historical  treatment,  see  Cunningliam,  Growth  of  English  Indns- 
try  and  Commerce ;  Ashley,  Economic  History ;  Seebohm,  English  Vil- 
lage Community  ;  and  for  the  later  periods,  Porter's  Progress  of  the 
Nation  and  Tooke's  History  of  Prices.  For  the  theory,  Marshall,  Princi- 
ples, Book  VI,  Chap.  IX ;  and  for  a  simpler  statement,  "Walker,  Land  and 
its  Bent. 


CHAPTER  IV 

PROGRESS   AND   PROFITS 

1.  General  View.  —  A  beginning  may  be  made  of  this 
chapter  as  of  the  last  by  a  brief  reference  to  the  growth 
of  opinion.  Mill  arrives  at  the  following  conclusion  as 
the  result  of  his  long  investigation  (by  the  abstract 
method)  of  the  effects  of  progress  on  rents,  wages,  and 
profits :  "  The  economical  progress  of  a  society  con- 
stituted of  landlords,  capitalists,  and  labourers  tends  to 
the  progressive  enrichment  of  the  landlord  class,  while 
the  cost  of  the  labourers'  subsistence  tends  on  the  whole 
to  increase,  and  profits  to  fall."  It  is  allowed  that  for  a 
time  agricultural  improvements  may  counteract  the  two 
last  effects,  and  check  the  rise  in  rent ;  but  it  is  supposed 
that  the  natural  growth  of  population  will  soon  transfer 
all  the  benefits  to  the  landlords  alone.  How  false  this 
view  is,  as  applied  to  agricultural  rents,  has  been  shown 
in  the  last  chapter ;  and  it  needs  no  showing,  if  we  look 
to  modern  conditions,  that  as  compared  with  the  owners 
of  agricultural  land  it  is  the  capitalists  who  have  been 
enriched  many  times  over.  Even  the  owners  of  land  in 
large  cities  cannot  boast  of  such  fortunes  as  the  fortunes 
of  modern  trade.  But,  as  already  shown,  the  term  profits 
is  complex  and  covers  very  different  forms  of  income  that 
vary  with  different  causes.     The  tendency  of  profits  to  a 

895 


396  •  ELEMENTS   OF   POLITICAL   ECONOMY 

minimum  can  only  be  retained  as  the  title  of  a  chapter  of 
economic  analysis. 

It  is  difficult  to  form  any  adequate  idea  of  the  general 
rate  of  profits  at  different  periods  if  the  term  is  taken  in 
an  extended  sense ;  but  there  is  one  important  element 
in  profits,  namely,  interest  to  which  the  historical  method 
may  be  applied  with  some  hope  of  success.  "  And  the 
progress  of  loan-interest  may  lead  us  to  form  some 
notion  of  the  progress   of  profit"  (Adam  Smith). 

2.  Progress  and  Loan-interest.  —  In  modern  economic 
theory  we  are  accustomed  to  separate  pure  interest  from 
interest  combined  with  other  elements,  e.g.  insurance 
against  risk  and  wages  for  the  trouble  of  managing  in- 
vestments, etc.  We  suppose  that,  given  perfect  security 
and  negotiability,  the  rate  of  interest  is  uniform  through 
the  whole  of  a  country  and  the  whole  range  of  invest- 
ments. We  say  nothing  of  the  nature  of  the  security  or 
the  method  of  realisation  of  the  principal  or  the  interest. 
This  conception  of  pure  interest  corresponds  in  the 
modern  world  to  an  important  economic  fact.  This  fact 
is,  however,  the  result  of  a  long  process  of  evolution. 
The  farther  we  go  back  the  less  do  we  find  examples 
of  pure  interest  or  of  uniformity  of  rates.  We  find 
rather  all  kinds  of  insecurity  and  all  degrees  of  mo- 
nopoly. The  history  of  interest  or  usury  is  closely  con- 
nected with  the  law  of  debt;  the  primitive  form  of 
security  offered  for  a  loan  was  the  freedom  of  the 
borrower  and  that  of  his  family.  It  is  remarkable  that 
with  the  lessening  of  the  penalties  for  the  non-payment 
of  interest,  on  the  whole  the  security  for  the  payment  has 
greatly  increased.      Also  with  the  abandonment  of   the 


PROGRESS   AND  PROFITS  397 

severe  penalties  against  usury,  the  abuses  of  usury  have 
diminished.  Probably  one  of  the  greatest  gains  of  the 
nature  of  consumers'  rents  is  the  gain  indicated  by  the 
fact  that  borrowers  under  modern  conditions  pay  not 
in  proportion  to  their  needs,  but  at  the  market  rate. 
The  exceptions  shown  by  recent  abuses  only  prove  the 
rule. 

Another  point  to  notice  in  the  contrast  of  ancient  and 
modern  conditions  is  that  the  farther  we  go  back  the 
more  were  loans  contracted  in  cases  of  necessity  in  times 
of  famine  or  war.  In  the  course  of  industrial  progress, 
loans  have  been  made  more  and  more  for  productive 
purposes,  and  with  similar  security  the  same  rate  is 
charged  for  whatever  object  the  loan  is  obtained.  Even 
in  ancient  times,  however,  we  have  instances  of  loans  for 
trading  purposes,  as  in  the  case  of  Athens  in  connection 
with  shipping. 

As  a  consequence  of  the  equalisation  of  interest  in  its 
various  forms,  on  the  whole  its  burden  has  decreased ; 
there  has  been  a  levelling  down  and  not  up,  as  is  only 
natural  from  the  substitution  of  competition  for  mo- 
nopoly. The  development  of  the  law  of  bankruptcy, 
and  more  recently  of  the  principle  of  limited  liability, 
has  rendered  lenders  more  cautious,  and  a  check  is  im- 
posed on  the  waste  of  capital.  The  increasing  impor- 
tance attached  to  public  credit  has  given  greater  security 
for  public  loans. 

The  fall  in  the  rate  of  interest  from  the  early  times  in 
which  high  interest  meant  bad  security,  and  the  exploita- 
tion of  necessity  by  monopoly,  was  no  doubt  a  sign  of 
progress ;  but  it  is  doubtful  once  a  certain  stage  has  been 


898  ELEMENTS  OF  POLITICAL  ECONOJ^IY 

reached,  whether  a  further  fall  in  the  rate  of  interest  is 
a  consequence  or  a  sign  of  progress. 

Loan-interest,  as  already  explained,  is  also  in  sympathy 
with  profit-interest,  and  there  may  be  a  rise  in  interest  on 
account  of  the  greater  openings  for  industrial  enterprise. 
In  the  reign  of  George  II  the  net  yield  in  the  return 
to  investments  in  the  British  funds  was  about  the  same 
as  at  present,  namely,  2|  per  cent.  In  1776,  the  year  of 
the  publication  of  the  Wealth  of  Nations,  the  rate  of 
interest  in  Scotland  on  first-class  mortgages  was  the 
same  as  at  the  end  of  the  nineteenth  century,  namely, 
3  per  cent,  and  the  present  (1903)  rate  is  I  per  cent 
higher.  But  it  is  plain  that  both  England  and  Scotland 
have  advanced  on  all  the  lines  of  economic  progress  since 
the  eighteenth  century. 

3.  Progress  and  General  Profits.  —  When  we  pass  from 
the  comparatively  simple  case  of  interest,  it  becomes  still 
more  difficult  to  discover  any  necessary  connection  be- 
tween the  rate  of  general  profits  and  the  rate  of  economic 
progress.  Although,  as  in  the  case  of  wages,  it  is  also 
useful  for  some  purposes  to  use  the  conception  of  a  gen- 
eral rate  of  profits,  and  to  quote  this  rate  as  a  percentage 
of  the  capital,  it  must  be  remembered  that  profit  per  cent 
per  annum  is  only  a  mode  of  estimating  the  actual  profit 
derived  from  the  turnover  of  the  capital.  (See  Marshall's 
Principles,  Book  VI,  Chap.  VIII.)  The  capital  value  of 
any  business,  at  any  particular  moment  of  time  is  the  sum 
total  of  its  assets  less  its  liabilities,  and  the  differences 
between  any  two  dates  is  the  gross  profit  over  the  period. 
How  much  of  this  gross  profit  is  put  down  as  interest  or 
as  insurance  {e.g.  as  in  the  creation  of  a  reserve  fund),  or 


PROGRESS  AND  PROFITS  399 

as  wages  of  management,  will  depend  on  the  custom  of  the 
trade,  and  for  the  purposes  of  theory  there  is,  besides,  the 
conception  of  quasi-Tent. 

The  connection  between  profits  and  prices  is  not  only- 
fundamental  in  practice,  but  in  a  very  true  sense  is  also 
fundamental  in  theory.  Changes  in  the  general  levels  of 
prices,  or  in  the  exchange  value  of  money,  apart  from  the 
disturbances  to  which  they  give  rise  in  the  period  of  tran- 
sition, do  not  affect  profits,  as  Mill  so  laboriously  explains. 
But  in  the  course  of  progress,  profits  depend  more  and 
more  on  exchanges,  and  exchanges  are  expressed  in  terms 
of  prices. 

When  once  a  society  has  passed  from  a  natural  to  a 
money  economy,  the  monetary  valuation  of  capital  (and 
thus  also  that  of  profits)  is  no  longer  a  secondary,  or  acci- 
dental, but  a  primary  quality. 

What  Mill  calls  the  incident  of  exchange  becomes  in 
fact  an  essential  part  of  the  substance  of  capital.  This 
historical  fact  had  been  thoroughly  grasped  by  Adam 
Smith  in  regard  to  circulating  capital.  Circulating  capi- 
tal is  that  which  affords  a  revenue  by  changing  hands. 
The  revenue  or  profit  arises  solely  from  a  continuous  oscil- 
lation of  exchanges  between  money  and  goods,  goods  and 
money.  The  capital  continues  its  existence  by  retaining 
its  money  valuation;  anything  beyond  is  profit  and 
may  be  lopped  off  as  revenue ;  anything  below  so  far 
shortens  its  life,  unless  the  defect  is  made  up  from  future 
profit. 

With  fixed  capital,  "which  yields  a  revenue  without 
changing  masters  "  at  fii-st  sight,  this  character  of  ex- 
change seems  excluded  from  Adam  Smith's  conception. 


400  ELEMENTS  OF  POLITICAL  ECONOMY 

Thus  to  take  his  example  of  seed  corn  :  "  Though  it  goes 
backward  and  forward  between  the  ground  and  the  gran- 
ary, it  never  changes  masters,  and  therefore  does  not  prop- 
erly circulate.  The  farmer  makes  his  profit  not  by  its 
sale,  but  by  its  increase." 

It  is  easy  to  show,  however,  that  even  in  agriculture  the 
money  valuation  is  essential  to  fixed  capital.  Recently 
many  English  farmers  went  on  growing  wheat  with  fall- 
ing prices ;  but  though  the  seed  was  returned  sevenfold 
as  before,  the  profit  became  less  and  the  capital  dwindled. 

Similarly  as  regards  buildings,  machinery,  and  the  like  : 
they  may  be  kept  in  good  repair,  and  worn-out  parts  may 
be  continuously  replaced ;  but  whether  or  not  this  part  of 
capital  has  suffered  real  depreciation,  depends  also  on  the 
competition  of  other  agents  of  production  affecting  the 
prices,  and  also  on  the  sales  of  the  product.  Machinery 
that  can  only  make  unsaleable  goods  has  logically  lost  its 
value  as  capital  as  effectually  as  if  it  had  been  corrupted 
by  rust  or  destroyed  by  rioters.^ 

1  It  is  worth  noting  that  Adam  Smith's  position  on  fixed  capital  is  still 
that  which  is  applied  in  the  Income  Tax  assessments  and  in  the  Companies 
Acts.  The  theory  in  both  Company  and  Income  Tax  law  seems  to  be  that 
fixed  capital  has  not  to  be  replaced  before  profits  are  arrived  at.  The  only 
notable  exception  is  that  aia  allowance  may  be  made  in  Income  Tax  returns 
for  the  wear  and  tear  of  machinery  and  plant  during  the  year ;  none, 
however,  may  be  made  for  depreciation  of  value. 

According  to  the  Companies  Acts  profits  are  the  excess  of  earnings  over 
disbursements  without  any  deduction  for  loss  of  capital. 

As  regards  economic  theory,  however,  it  may  be  pointed  out  that  the 
Income  Tax  law  is  full  of  anomalies  and  inconsistencies  ;  and  in  practice, 
if  a  shareholder  in  a  company  receives  larger  dividends  from  "wasting" 
subjects,  he  must,  to  keep  his  capital  intact,  himself  set  aside  a  sum  for 
depreciation. 


PROGRESS  AND  PROFITS  401 

4.  The  Tendency  of  Profits  to  a  Minimum.  — "  To 
popular  apprehension,"  says  Mill  (^Principles^  Book  II. 
Chap.  XVI,  Sec.  6),  "  it  seems  as  if  the  profits  of  business 
depended  upon  prices  ;  "  and  later  on  in  dealing  with  the  ten- 
dency of  profits  to  a  minimum  (^Principles,  Book  IV,  Chap. 
IV,  Sec.  1)  he  controverts  Adam  Smith's  argument  on  the 
inter-connection  of  profits  and  prices.  But  as  is  so  often  the 
case  with  Mill's  paradoxes,  Adam  Smith  and  popular  opinion 
express  a  great  truth  which  Mill  conceals  with  refinements 
of  language.  Profit,  argues  Mill,  arises  not  from  the  inci- 
dent of  exchange,  but  from  the  productive  power  of  labour. 

But  under  a  monetary  economy  all  profits  depend  upon 
differences  in  relative  prices,  and  the  number  of  prices  of 
sufficient  magnitude  to  affect  the  margin  of  profits  in  any 
particular  business  is  very  great.  The  price  of  the  labour 
directly  employed  is  not  always  of  predominant  importance. 
Since,  moreover,  all  prices  depend  upon  demand  as  well  as 
on  suppl}^  any  account  of  profit  which  refers  only  to  the 
productive  power  of  labour  omits  the  principal  and  most 
difficult  parts  of  the  problem.  Even  from  the  point  of 
view  of  production  in  the  narrowest  sense  of  the  term,  the 
exposition  is  incomplete  :  capital  in  this  sense  has  also  pro- 
ductive power;  machinery  may  be  substituted  for  labour 
and  may  be  auxiliary  to  labour ;  and  if  wages  are  ascribed 
to  the  productive  power  of  labour,  profits  may  with  equal 
justice  be  assigned  to  the  productive  power  of  capital. 

Productive  power,  however,  with  the  widest  interpreta- 
tion, cannot  extend  beyond  supply,  and  both  wages  and 
profits  in  societies  resting  on  exchange  must  depend 
equally  on  demand. 

Money  wages   and   profits   are   both   cases   of  relative 

2d 


402  ELEMENTS  OF  POLITICAL  ECONOMY 

prices.  Considered  from  this  point  of  view,  there  is,  in- 
deed, one  sense  in  which  the  tendency  of  profits  to  fall 
with  the  progress  of  society  may  be  affirmed  as  a  general 
proposition  —  and  that  is  in  the  sense  plainly  indicated  by 
Adam  Smith.  So  far  as  profits  depend  on  buying  to  sell 
again,  the  increase  of  competition  tends  to  diminish  the 
differences  between  the  buying  and  selling  prices.  In  gen- 
eral, competition  prices  are  lower  than  monopoly  prices. 
This  argument  applies  also  to  the  difference  between  the 
price  of  labour  and  the  sale  of  its  product ;  the  profits  of 
interchange  fall  as  the  difference  diminishes,  and  either 
the  labourer  or  the  consumer  must  reap  the  benefit.  If, 
then,  as  is  the  case  in  modern  industrial  societies,  the  great 
body  of  labourers  is  the  same  as  the  great  body  of  con- 
sumers, we  may  say  that  real  wages  rise  at  the  expense  of 
profits. 

As  already  explained,  however,  profits  is  complex,  and 
a  large  part  is  itself  wages.  It  is  quite  possible  that  the 
wages  of  management  per  unit  of  time  may  rise  continu- 
ously compared  with  other  kinds  of  time  wages,  whilst 
profits  on  the  turnover  of  capital  are  continuously  dimin- 
ished. Men  more  often  become  millionnaires  by  handling 
large  capitals  with  small  differences  than  by  handling 
small  capitals  with  large  differences. 

The  wages  of  management  of  large  capitals  is  per  unit 
of  tiyne  by  far  the  highest  of  all  wages.  So  high,  indeed, 
is  the  reward  that  the  term  wages  seems  altogether  inap- 
plicable in  many  cases,  and  quasi-VGint  is  more  suggestive 
of  the  fabulous  riches  involved. 

Similarly  as  regards  the  third  element  in  gross  profits, 
namely,  insurance  against  risk.     In  the  course  of  progress 


PROGRESS  AND  PROFITS  403 

the  sphere  of  insurance  extends,  and  so  far  the  element 
of  risk  is  extruded  from  gross  profits.  The  mediaeval 
ship-owner  had  to  take  the  risk  of  all  kinds  of  perils, 
the  insurance  against  which  is  now  as  much  a  part  of 
cost  as  the  safety  valves  in  the  boiler  or  the  water-tight 
compartments. 

But  the  maxim  still  holds  good  that  the  greater  the  risk 
to  the  individual,  the  greater  the  profit.  The  organisation 
of  modern  markets  affords  the  possibility  of  immense  gains, 
provided  the  speculator  risks  everything.  Risk  of  this 
kind,  however,  is  the  risk  of  speculation,  and  obviously 
does  not  admit  of  insurance. 

But  speculation  may  mean  anything,  from  reckless,  igno- 
rant gambling,  in  which  one  man's  gain  is  another  man's 
loss,  to  far-seeing  calculations  of  the  course  of  progress  in 
all  its  departments.  Speculation  of  this  second  kind  some- 
times deserves  to  rank  with  the  highest  efforts  of  practical 
genius,  for  without  it  such  efforts  never  gain  an  opportu- 
nity for  realisation.  Occasionally,  however,  even  bona  fide 
and  well-founded  speculation  obtains  an  extravagant  reward 
as  the  result  of  good  fortune ;  but  such  occasional  rewards 
encourage  the  highest  forms  of  enterprise,  and  fortune  can 
only  be  seized  in  industry  or  in  war  by  daring.  "  What  a 
force  it  is  !  It  alone  imparts  courage.  It  is  the  feeling 
that  fortune  is  with  us  that  gives  us  the  hardihood  to  dare. 
Not  to  dare  is  to  do  nothing  of  moment,  and  one  never 
dares  except  in  the  confidence  that  fortune  will  favour  us  " 
(Napoleon).  It  is,  however,  useless  to  attempt  to  strike 
an  average  in  cases  of  this  kind. 

On  the  whole,  the  conclusion  is  that  if  the  expression, 
general  rate  of  profits  is  still  retained  in  its  widest  sig- 


404  ELEMENTS   OF   POLITICAL   ECONOMY 

nificance,  the  effects  of  progress  on  this  general  rate  must 
be  said  to  be  indeterminate.^ 

1  See  Principles,  Book  IV,  Chap.  VI.  In  this  summary  the  historical  mat- 
ter has  been  omitted,  but  the  last  section  has  been  reproduced  almost  in 
full.  The  critical  note  on  the  connection  between  prices  and  profits  has 
been  omitted. 

On  the  history  of  loan-interest,  see  Ashley's  Economic  History,  Vol.  I, 
Part  2,  and  Cunningham's  Usury ;  on  the  general  theory,  Smart's  trans- 
lation of  Boehm-Bawerk  on  Capital  and  Interest;  Marshall,  Principles, 
Book  VL 


CHAPTER   V 

PROGRESS   AND   WAGES 

1.  Progress  and  the  Price  of  Labour.  —  In  considering 
the  effects  of  progress  on  wages,  wages  may  in  the  first 
place  be  regarded  as  the  price  of  labour.  The  price  of 
labour  is  of  course  only  one  element  in  the  well-being 
of  labour;  but  it  is  a  very  important  element,  and  changes 
in  the  price  of  labour  are  associated  with  the  principal 
features  of  economic  progress.  As  already  explained,  the 
price  of  labour  may  be  quoted,  broadly  speaking,  in  two 
ways,  namely,  per  unit  of  work  done  or  per  unit  of  time. 
The  two  methods  are  closely  connected,  as  it  is  always 
understood  that  so  much  must  be  done  in  the  day's  work, 
and  that  any  piece  of  work  must  be  done  within  certain 
limits  of  time.  For  historical  purposes  the  unit  taken 
is  in  most  cases  the  day,  and  rates  of  piece-work  can  in 
the  common  forms  of  labour  be  reduced  to  this  standard. 
The  rate  per  day  is,  however,  a  fallacious  test  of  earnings 
unless  allowances  are  made  for  regularity  of  employment 
(and  conversely).  In  estimating  real  wages  there  are  as 
explained  above  (Book  II,  Chap.  VI)  other  elements  to 
be  taken  account  of  besides  the  money  earned  and  what 
the  money  will  purchase.  But  a  comparison  of  money 
earnings  with  the  chief  articles  of  workmen's  budgets 
must  generally  be  the  foundation  of  estimates  of  varia- 
tions in  real  wages. 

405 


406  ELEMENTS  OF   POLITICAL   ECONOMY 

Exception,  however,  must  be  made  to  the  common  prac- 
tice of  taking  as  representative  of  Jabour  only  the  lowest 
or  most  badly  paid  forms  of  labour.  Such  estimates  are 
no  doubt  both  interesting  and  important.  But  if  real  wages 
are  interpreted  in  terms  of  pecks  of  wheat,  and  labour  is 
interpreted  to  mean  the  lowest  class  of  agricultural 
labour,  such  estimates  cover  only  a  small  part  of  the 
field  of  economic  progress. 

Estimated  in  this  way  the  progress  of  the  working 
classes  has  been  by  no  means  continuous  —  taking  for 
example  the  history  of  English  labour  during  the  last 
six  centuries  —  and  there  might  even  appear  to  be  some 
justification  for  the  idea  that  the  golden  age  of  English 
labour  was  in  the  fifteenth  century.  But  in  estimating 
the  economic  progress  of  the  labouring  classes,  perhaps 
the  most  important  point  of  all  to  determine  is  the 
increasing  differentiation  of  labour,  and  the  increase 
proportionately  in  the  higher  grades  as  compared  with 
the  lowest. 

This  differentiation  of  labour  is  well  shown  by  the  varia- 
tions in  prices  for  different  forms  of  labour.  If  we  allow  for 
the  differences  in  the  net  advantages  of  the  employments,  it 
is  the  difference  in  the  money  wages  which  is  the  determin- 
ing force  in  the  distribution  of  labour  in  the  different  occu- 
pations. A  new  industry  in  order  to  attract  labour  must 
offer  higher  wages,  and  in  the  course  of  progress  the 
changes  in  the  occupations  of  the  people  may  be  accounted 
for  by  the  cumulative  effects  of  differences  in  the  rates 
of  remuneration  which  they  offer. 

It  is  probable  that  in  the  fourteenth  century  in  England 
and  Wales  the  number  of  males  employed  in  agriculture 


PROGRESS  AND  WAGES  407 

was  no  greater  than  the  number  so  employed  at  present. 
But  whilst  in  the  former  period  the  great  bulk  of  the 
working  population  was  dependent  on  agriculture,  and 
women  worked  nearly  as  much  as  men,  at  present  of  the 
total  number  of  male  workers  less  than  12  per  cent  are 
in  agriculture,  and  practically  no  women,  thus  leaving 
the  bulk  of  the  people  employed  in  other  industries. 
For  centuries  there  has  been  a  constant  stream  of  labour 
flowing  from  the  country  to  the  towns,  and  the  present 
diversity  in  English  industries  may  be  partly  accounted 
for  by  differences  in  wages  in  the  mediasval  period. 

The  result  of  a  general  survey  of  agricultural  and  arti- 
san wages  is  that  the  latter  have  always  exceeded  the 
former.  In  England,  up  to  the  end  of  the  eighteenth 
century  (downward  from  the  thirteenth),  the  wages  of 
the  carpenter  were  in  general  50  per  cent  higher;  and 
during  the  nineteenth  century  they  have  become  100 
per  cent  higher  than  those  of  the  agricultural  labourer. 
About  the  middle  of  the  seventeenth  century  the  wages 
of  common  unskilled  labour  in  the  towns  began  to 
exceed  those  of  agriculture.  It  has  often  been  observed 
that  the  wages  in  agriculture  are  highest  in  the  neighbour- 
hood of  mining  and  manufacturing  districts ;  and  in  gen- 
eral, wages  in  London  have  been  higher  than  in  the 
provincial  towns  in  which  the  connection  with  agricul- 
ture is  much  closer.  We  find  in  these  facts  a  proximate 
cause  of  the  growth  of  the  towns  at  the  expense  of  the 
country,  and  of  London  and  the  larger  cities  at  the 
expense  of  the  towns.  Labour  tends  to  flow  where 
the  reward  is  highest. 

The   same    facts    as    regards   wages    and    occupations 


408  ELEMENTS   OF   POLITICAL   ECONOMY 

also  illustrate  the  difference  between  the  statical  and 
dynamical  action  of  economic  forces.  In  spite  of  the 
continuous  migration  of  labour  from  the  country  to  the 
town,  the  balance  of  money  wages  is  still  largely  in  favour 
of  the  town,  nor  can  the  difference  be  explained  by  the 
greater  attractiveness  of  the  country  life ;  to  the  labourers 
themselves,  now  as  ever,  the  pleasures  and  the  freedom  of 
the  town  seem  greater  than  those  of  the  country.  These 
broad  historical  facts  also  show  in  a  very  realistic  manner 
the  nature  of  economic  laws  and  tendencies ;  the  tendency 
only  indicates  the  direction  of  a  movement  in  the  absence 
of  disturbing  causes ;  it  does  not  imply  that  even  in  the 
course  of  centuries  a  certain  definite  result  will  be  attained. 
The  tendency  to  the  equalisation  of  the  net  advantages 
of  different  employments  to  equally  efficient  labour  only 
indicates  the  resultant  action  of  certain  economic  forces ; 
it  does  not  mean  that  in  a  long  enough  period  such  an 
equalisation  will  be  attained. 

Similar  reasoning  may  be  employed  in  dealing  with  the 
wages  and  the  occupations  of  women  and  children.  But 
in  both  cases  a  new  factor  is  introduced :  progress  here 
may  be  estimated  to  a  great  extent  by  the  contraction  in 
the  field  of  employment.  It  has  been  a  gain  to  the  nation 
at  large,  as  well  as  to  those  most  directly  concerned,  that 
women  have  been  excluded  by  law  from  work  in  mines, 
etc.,  and  by  natural  economic  forces  almost  as  effec- 
tively from  agriculture.  In  the  employments  equally  well 
adapted  for  women,  progress  has  consisted  in  raising  the 
rates  of  wages  nearly  to  an  equality  with  those  of  men 
for  the  same  degrees  of  efficiency.  When  large  numbers 
of  women  were  employed  in  the  same  industries  as  men, 


PROGRESS  AND  WAGES  409 

the  tendency  was  for  the  men  to  gain  the  advantage  in 
industrial  competition ;  they  were  superior  in  physical 
strength  and  still  more  so  in  moral  coercion.  Thus 
women  were  gradually  excluded  from  the  more  gainful 
occupations,  and  by  the  force  of  habit  they  came  to  be 
considered  unwomanly.  Until  recently,  though  half  the 
people  in  the  world  are  females,  there  was  still  a  prejudice 
against  lady  doctors ;  and  though  women  are  often  litigants, 
they  are  rarely  lawyers,  even  if  the  law  permits.  The 
exclusion  of  women  from  certain  occupations  increased 
the  supply  and  thus  lowered  the  wages  in  employments 
to  which  they  were  admitted.  In  recent  years,  however, 
the  great  natural  economic  forces  have  been  working  in 
favour  of  women.  The  growing  wealth  of  the  people  has 
enabled  a  larger  proportion  of  women  to  devote  themselves 
to  the  duties  of  family  life,  and  the  lessened  competition 
for  the  gainful  employments  has  so  far  raised  wages. 

The  employment  of  children,  both  as  regards  the  amount 
of  work  and  the  kind  of  occupations,  is  one  of  the  best 
signs  of  economic  progress.  Since  1891,  in  the  United 
Kingdom,  the  employment  of  children  under  ten  has  been 
prohibited  in  most  gainful  occupations,  and  the  employ- 
ment of  children  of  less  tender  years  has  been  strictly 
regulated.  In  1891  more  than  80  per  cent  of  the  children 
of  the  United  Kingdom  under  fifteen  years  of  age  were 
"  unoccupied,"  which  in  most  cases  means  that  they  were 
still  being  educated.  The  evils  of  the  employment  of 
children  in  the  factories  after  the  industrial  revolution 
are  now  as  well  known  and  as  heartily  condemned  as  the 
horrors  of  the  slave  trade ;  but  it  is  not  so  well  known  that 
in  former  times  the  employment  of  children  in  agriculture 


410  ELEMENTS   OF   POLITICAL   ECONOMY 

and  in  the  domestic  industries  was  associated  with  grave 
abuses. 

In  a  general  view  of  economic  progress  the  terms  labour 
and  wages  ought  to  be  taken  in  the  widest  sense ;  and 
account  ought  to  be  taken  of  the  labour  and  the  pay  of 
those  employed  in  the  various  professions  and  in  the 
higher  departments  of  industry.  Here  the  chief  point  to 
notice  is  not  only  the  rise  in  the  average,  but  the  enormous 
wages  of  the  most  successful.  We  observe  the  analogy  with 
the  differences  in  the  relative  prices  of  saleable  "things." 
With  the  increase  in  wealth,  scarcity  values  of  all  kinds 
may  attain  extravagant  heights.  The  highest  of  all  wages 
are  the  wages  of  management,  if  the  term  is  extended  so 
as  to  cover  all  the  gross  profit  that  is  not  set  aside  as  pure 
interest  and  insurance. 

2.  The  Relations  of  Labour  and  Capital.  —  Progress  may 
also  be  considered  from  the  point  of  view  of  the  relations 
of  labour  and  capital.  This  is  a  very  large  subject  and 
can  only  be  properly  treated  by  detailed  economic  history. 
Here  it  must  suffice  to  indicate  that  certain  popular  ideas 
on  the  subject  are  not  well  founded.  It  is  often  supposed 
that  it  is  only  in  modern  times,  since  the  introduction  of 
machinery  on  a  large  scale  in  all  its  forms,  that  capital  has 
become  stronger  than  labour,  and  that  under  simpler  con- 
ditions labour  was  more  independent  and  obtained  a  greater 
proportionate  share  in  the  combined  product  of  labour  and 
capital.  The  falsity  of  this  view  may  be  shown  by  a  very 
simple  consideration.  In  the  pre-machinery  age  the  greater 
part  of  the  people  were  employed  in  agriculture,  and  the 
farther  we  go  back  the  greater  was  the  proportion.  But 
as  already  shown,  agricultural  wages  were  always  relatively 


PROGRESS  AND  WAGES   *  411 

low.  And  if  we  look  to  the  relations  of  labour  and  capital 
in  this  dominant  industry,  the  relative  superiority  of  capital 
was  far  greater  than  in  modern  large  industries.  Even 
after  the  effective  abolition  of  serfdom  the  agricultural 
labourer  was  oppressed  by  the  weight  of  custom  and  of 
law.  In  the  reign  of  Elizabeth  it  was  enacted  that  all 
single  persons  between  twelve  and  sixty  not  having  a 
visible  livelihood  "  are  compellable  by  the  justices  to  go 
out  to  service  in  husbandry."  The  laws  of  settlement 
were  almost  as  eifective  as  villeinage  in  keeping  the 
villagers  to  their  own  village  ;  and  as  Adam  Smith  said 
of  his  own  time,  there  was  scarce  a  man  of  forty  who  had 
not  suffered  from  this  ill-contrived  law. 

Again,  even  in  tlie  towns  it  is  false  to  suppose  that  every 
worker  was  an  independent  master  as  soon  as  he  ceased  to 
be  an  apprentice ;  the  gilds  only  included  the  aristocracy 
of  labour,  and  the  misery  of  the  labouring  poor  in  the  towns 
was  probably  greater  in  proportion  the  farther  we  go  back. 

Under  the  system  of  large  industry  and  labour  hired  for 
wages  there  cannot  be  intimate  personal  relations  ;  but 
there  is  no  reason,  in  the  nature  of  things,  why  there 
should  not  be  good  feeling  and  general  interest  in  the 
success  of  the  business.  And  experience  shows  that,  as 
a  rule,  the  more  successful  the  business  the  better  the 
relations  of  labour  and  capital.  Mill  supposed  that  the 
relations  of  master  and  workmen  would  be  gradually 
superseded  by  partnership  in  one  of  two  forms ;  namely, 
either  profit-sharing  or  cooperation  ;  but  his  forecast  has 
been  singularly  untrue.  Taking  production  in  the  popular 
and  narrow  sense  of  the  term,  as  it  was  taken  by  JNIill  in 
this  forecast,  it  may  be  said  that  the  proportion  conducted 


412  ELEMENTS  OF   POLITICAL   ECONOMY 

on  the  lines  of  these  industrial  partnerships  is  so  small  as 
to  be  hardly  worth  considering.  On  the  other  hand,  the 
opposing  combinations  of  labour  and  capital,  the  trade 
unions  and  the  associations  of  employers,  have  grown 
greatly  in  strength.  It  seems  as  if  improvements  in  the 
relations  of  capital  and  labour  are  to  be  looked  for  partly 
in  the  development  of  arbitration  and  conciliation,  and 
partly  in  legislation  as  regards  the  conditions  of  employ- 
ment on  the  side  of  sanitation,  etc. 

Finally,  it  may  be  pointed  out  that  no  extension  of  the 
principle  of  association  or  combination  to  labour  can  dis- 
place altogether  the  principle  of  individual  competition. 
There  must  always  be  industrial  competition  between  the 
different  processes  in  manufacture.  The  system  of  large 
industries  does  not  mean  that  there  are  uniform  rates  of 
wages  in  each  of  these  industries,  or  that  in  each  a  species 
of  wages  fund  is  equally  distributed :  there  are  in  manu- 
factures thousands  of  different  rates,  and  they  are  deter- 
mined in  the  last  resort  by  competition  and  "  the  principle 
of  substitution."  ^ 

1  Frincij^les,  Book  IV,  Chap.  VII,  gives  a  good  deal  of  historical  mat- 
ter condensed  from  the  works  of  Rogers,  Vicomte  d'Avenel,  Cunning- 
ham, etc.;  for  the  early  periods,  Eden's  State  of  the  Poor  is  the  standard 
work ;  for  the  nineteenth  century  the  works  of  Mr.  and  Mrs.  Webb  on 
Trade  Unions  and  Industrial  Democracy  are  full  and  valuable  on  the  in- 
dustries with  which  they  deal,  but  should  be  supplemented  by  special 
works,  e.g.  the  oflBcial  reports  on  Agricultural  Wages  by  Mr.  Wilson 
Fox  ;  the  v?ages  of  domestic  servants  by  Miss  Collet ;  see  also  Bowley, 
Wages  in  the  United  Kingdom  in  the  Nineteenth  Century ;  Palgrave,  Dic- 
tionary of  Political  Economy,  Art,  "Wages";  Mayo  Smith,  Statistics 
and  Economics. 


BOOK   V 

THE  ECONOMIC  FUNCTIONS  OF 
GOVERNMENT 


CHAPTER  I 

ECONOJVnC   FUNCTIONS   OF   GOVERNMENT 

1.  The  Principle  of  Natural  Liberty,  Laisser-faire,  or 
"  Minimum  Interference."  —  Contrary  to  the  popular  view, 
Adam  Smith  did  not  set  up  the  system  of  minimum  inter- 
ference as  an  economic  ideal,  and  still  less  as  the  most 
general  political  ideal.  At  the  very  outset  of  his  prelimi- 
nary presentment  of  the  "  obvious  and  simple  system  of 
natural  liberty,"  he  introduces  a  most  important  qualify- 
ing clause.  Every  man  is,  indeed,  on  this  system  left 
perfectly  free  to  pursue  his  own  interest  in  his  own  way, 
but,  mark  the  qualification,  only  "as  long  as  he  does  not 
violate  the  laws  of  justice."  Thus  the  freedom  of  compe- 
tition of  the  industry  and  capital  of  individuals  is  always 
subject  to  the  limitations  of  these  avowedly  higher  laws  of 
natural  justice.  And  again,  according  to  the  system  of 
natural  liberty,  the  sovereign  has  —  it  is  true  —  only  three 
duties  to  attend  to,  but  they  are  duties  of  the  greatest  im- 
portance, viz.  protection  against  other  states ;  the  protec- 
tion of  every  member  of  the  society  from  the  injustice  or 
oppression  of  every  other  member  of  it ;  and,  finally,  the 
duty  of  erecting  and  maintaining  certain  public  works  and 
institutions  which  it  can  never  be  the  interest  of  any  indi- 
vidual, or  small  number  of  individuals,  to  erect  and  main- 
tain. Thus,  according  to  the  actual  teaching  of  Adam 
Smith,  if  competition  leads  to  injustice  or  oppression,  the 

415 


41 G  ELEMENTS   OF   POLITICAL   ECONOMY 

State  ought  to  intervene ;  and  if  self-interest  is  inadequate 
to  provide  various  institutions  for  the  satisfaction  of  social 
needs,  the  State  ought  to  provide  for  their  erection  and 
maintenance. 

2.  The  Principle  of  Maximum  Utility.  —  The  system  of 
maximum  utility  is  a  deduction  from  the  general  system 
of  utilitarianism.  On  this  view  the  art  of  political  econ- 
omy has  for  its  object,  briefly  stated,  the  attainment  of  the 
maximum  utilit}^  of  which  the  society  is  capable  by  means 
of  wealth.  Accordingl}^  the  government  may  interfere 
with  the  freedom  of  individuals  in  production  if  it  can  in- 
crease the  aggregate  of  wealth ;  and  it  may  interfere  with 
their  freedom  in  distribution  if  on  the  whole  a  greater 
amount  of  utility  accrues  to  the  members  of  the  society. 

The  prima  facie  ground,  says  Sidgwick,  for  the  interfer- 
ence of  government  with  the  distribution  of  produce  is  the 
great  and  ever  increasing  inequalities  in  income  to  which 
the  individualistic  organisation  leads.  The  common  sense 
of  mankind,  he  asserts,  holds  these  inequalities  to  be  objec- 
tionable for  reasons  stated  explicitly  in  two  propositions 
laid  down  by  Bentham. 

These  propositions  are  (1)  that  an  increase  of  wealth  is, 
speaking  broadly  and  generally,  productive  of  an  increase 
of  happiness  to  its  possessor;  and  (2)  that  the  resulting 
increase  of  happiness  is  not  simply  proportional  to  the 
increase  of  wealth,  but  stands  in  a  continually  decreasing 
ratio  to  it. 

T\\Q  first  of  these  propositions  may  easily  be  reduced  to 
a  truism  by  those  who  identify  utility  with  happiness  ; 
and  the  second  proposition  is  simply  a  statement  of  the  law 
of   diminishing  utility  which   has    already  been  so  fully 


ECONOMIC  FUNCTIONS  OF  GOVERNMENT        417 

illustrated ;  a  shilling  to  the  man  that  is  fasting  would 
mean  more  happiness  than  to  the  man  that  is  full. 

The  conclusion  that  is  drawn  from  these  innocent  propo- 
sitions is  said  to  be  obvious.  "  From  the  two  propositions 
taken  together  the  obvious  conclusion  is  that  the  more 
any  society  approximates  to  equality  in  the  distribution  of 
wealth  amongst  its  members,  the  greater,  on  the  whole,  is 
the  aggregate  of  satisfaction  which  the  society  in  question 
derives  from  the  wealth  that  it  possesses." 

It  would  appear  to  follow  that  the  State  ought  to  use  its 
power  to  correct  the  inequalities  that  spring  from  the 
selfishness  of  individuals,  and  to  look  to  the  maximum 
happiness  of  the  whole  society.  And  this  indeed  is  the 
argument  of  those  who  advocate  communism  or  socialism. 
But  this  simple  solution  fails  even  on  utilitarian  grounds. 
If  the  food  and  other  produce  to  be  distributed  fell  like 
manna  from  heaven,  equality  or  inequality  of  distribution 
would  not  affect  the  supply  of  the  food  or  of  the  mouths  to 
eat  it.  It  is  not  so,  however,  with  economic  utilities.  Eco- 
nomic utilities  are  in  general  the  result  of  labour  and  sacri- 
fice, and  in  their  case  equality  of  distribution  would,  as 
Sidgwick  shows,  at  the  same  time  diminish  the  dividend 
and  increase  the  divisor,  and  in  the  end  the  diminished 
quotient  might  give  less  than  the  aggregate  happiness 
insured  by  the  present  system. 

The  inference  drawn  from  the  two  Benthamite  proposi- 
tions is  only  legitimate  under  certain  conditions,  viz. 
"  that  the  total  amount  of  produce  to  be  divided,  and  the 
number  of  persons  among  whom  it  is  to  be  divided,  re- 
mains unaffected  by  the  change  in  distribution."  And  a 
third  condition  is  added  to  the  effect  that  the  change  has 

2e 


418  ELEMENTS  OF  POLITICAL  ECONOMY 

no  tendency  to  diminish  the  happiness  of  the  community 
so  far  as  it  is  derived  from  other  sources  than  the  increase 
of  Avealth,  such,  for  example,  as  "  culture,"  and  the  virtues 
which  are  fostered  by  the  strivings  of  individuals  under 
unequal  conditions. 

3.  Summary  of  the  Benefits  and  Defects  of  Individual- 
ism. —  It  is  universally  recognised  that  in  consumption 
freedom  is  beneficial,  and  must,  at  any  rate,  be  the  general 
rule.  It  is  true,  to  take  the  prominent  examples,  that  there 
are  laws  against  adulteration  and  laws  regulating  the  con- 
sumption of  liquor ;  but  the  whole  of  these  laws  affect  the 
aggregate  mass  of  consumption  to  a  relatively  small  extent. 

As  regards  production,  freedom  of  enterprise  and  free- 
dom in  the  selection  of  processes  is  still  the  rule,  and  qua 
production  is  recognised  as  beneficial.  Every  industry  is 
constantly  changing  and  the  initiative  is  taken  by  individ- 
uals, and  the  survival  of  the  fittest  in  productive  processes 
is  achieved  by  competition.  Even  when  commercial  com- 
petition is  restrained  by  a  trust,  industrial  competition  sur- 
vives within  the  ring.  But  when  production  is  regarded, 
not  from  the  point  of  view  of  the  products,  but  from  that 
of  the  personality  of  the  producers,  the  case  is  by  no  means 
so  simple.  It  is  true  that  effective  competition  tends  to 
increase  the  efficiency  of  labour,  and  one  of  the  factors  in 
efficiency  is  improvement  in  the  conditions  of  work.  On 
the  whole,  however,  competition  acts  very  imperfectly  in 
securing  the  best  conditions  of  production  as  affecting  the 
health  and  morals  of  the  workers,  and  regulation  by  the 
State  has  been  extensively  adopted  with  success. 

As  regards  the  distribution  of  the  national  wealth,  the 
tendency   of    competition  —  if    effective    as    regards    the 


ECONOMIC  FUNCTIONS  OF  GOVERNMENT        419 

mobility  of  the  productive  agents  and  the  organisation  of 
markets  —  is  to  proportion  reward  to  the  net  value  of  the 
service  rendered  to  the  society.  And  in  many  cases  in- 
equalities of  reward  in  this  sense  would  be  remedied  by 
more  effective  competition.  In  fact,  the  main  factor  in  the 
progress  of  distribution  has  been  the  substitution  of  free- 
dom of  contract  for  privilege  and  delegated  or  permitted 
authority.  There  are,  however,  many  cases  in  which  the 
conditions  essential  to  freedom  of  contract  do  not  prevail, 
and  there  are  others  in  which  freedom  of  contract  passes 
into  freedom  of  coercion. 

Such  is  especially  the  case  with  associations  which  are 
instituted  on  a  voluntary  or  contractual  basis.  Such  as- 
sociations easily  attain  powers  which,  relatively  to  individ- 
uals, give  them  an  overpowering  position ;  and  a  combina- 
tion of  associations  may  have  similar  power  compared  to  any 
one.  There  are  further  relations  assumed  by  associations 
towards  the  public  which  could  never  arise  with  individuals. 
One  man  is  as  nothing  against  the  whole  people ;  but  one 
company,  still  more  one  gigantic  trust,  may  revive  in  a 
new  form  the  old  right  of  private  taxation.  The  predatory 
and  parasitic  tendencies  of  combinations  are  far  stronger 
than  those  of  individuals,  just  as  a  mob  is  more  cruel  than 
the  average  of  its  members.  And  altogether  apart  from 
abuses,  the  civil  relations  of  associations  to  third  parties 
are  extremely  complex.  Accordingly,  a  large  part  of 
mercantile  law  is  occupied  with  various  economic  combina- 
tions, e.g.  partnerships,  companies,  unions,  and  associa- 
tions, and  with  further  development,  further  extension 
of  the  law  may  be  necessary. 

Thus  when  we  take  a  dispassionate  survey  of  individual- 


420  ELEMENTS   OF   POLITICAL   ECONOMY 

ism,  considered  as  the  basis  of  modern  industrial  societies, 
we  find  it  is  open  to  criticism  both  in  principle  and  in  detail. 

The  two  supports  of  the  system  are  freedom  and  self- 
interest.  But  freedom  is  freedom  under  the  law,  and  self- 
interest  includes  interest  in  others  and  in  the  State.  Thus 
freedom  is  not  merely  absence  of  restraint  or  the  negation 
of  government.  On  the  contrary,  it  may  be  said  that  the 
highest  form  of  government  is  that  which  secures  the 
highest  form  of  liberty. 

And  self-interest  may  be  so  interpreted  as  to  mean  that 
higher  self,  which  in  every  man  is  supposed  to  sit  in 
judgement  on  the  doings  of  his  imperfect  and  misguided 
self.  And  again  reason  may  counsel  the  suppression,  by 
the  power  of  law,  of  various  forms  of  lower  self-interest. 

And  in  each  of  the  great  economic  departments  we 
find  that  abuses  and  failures  may  arise  from  unregu- 
lated individualism.  In  consumption,  in  production,  and 
in  distribution  there  are  cases  which  seem  prima  facie  to 
call  for  remedies  on  the  part  of  the  State. 

4.  The  Methods  of  Legal  Interference.  —  The  methods  of 
governmental  interference  may  be  divided  into  two  great 
groups.  First,  the  government  may  regulate  the  actions  of 
individuals  by  providing  and  enforcing  a  system  oi  positive 
laio  ;  and  secondly,  the  government  may  itself  perform  cer- 
tain econc.mic  functions. 

Under  the  jirst  group  we  observe :  (a)  the  govern- 
ment may  bring  certain  kinds  of  economic  abuses  — 
whether  of  omission  or  commission  —  under  \hQ  penal  law, 
and  inflict  punishments  of  various  degrees  of  intensity 
upon  the  offender. 

The  simplicity  of  the  method  of  regulation  through  the 


ECONOMIC   FUNCTIONS   OF   GOVERNMENT        42] 

criminal  law  has  always  made  it  attractive  to  legislators 
and  reformers.  This  method,  however,  is  subject  in  prac- 
tice to  very  effective  limitations.  Just  as  the  letter  of 
the  law  varies  with  the  ideas  of  its  fraraers,  so  also  does 
the  enforcement  vary  with  the  ideas  of  its  administrators. 
The  greatest  agency  in  the  mitigation  of  criminal  statutes 
in  England  has  undoubtedly  been  the  refusal  of  juries  to 
convict,  and  of  judges  to  inflict  the  penalties ;  the  juries 
have  turned  a  blind  eye  to  the  evidence,  and  the  judges 
have  given  them  the  appearance  of  reason  by  legal  fic- 
tions. It  follows  that  the  limits  to  the  power  of  govern- 
mental action  by  the  method  of  criminal  legislation  are 
found  in  the  actual  moral  sense  of  the  community ;  the 
ultimate  sanction  of  the  criminal  law  as  regulating  eco- 
nomic actions  is  found  in  public  opinion.  Thus,  even  as 
regards  the  obvious  and  simple  system  of  coercion,  the 
tendencies  of  the  opposing  system  of  natural  liberty  have 
to  be  considered. 

(b)  The  government,  without  going  the  length  of 
prohibiting  or  penalising  certain  actions,  may  refuse  to 
enforce  the  corresponding  agreements  or  promises  of  per- 
formance. In  some  cases  this  refusal  rests  on  the  legal 
incapacity  of  the  persons  to  make  the  agreement  binding. 

The  development  of  mercantile  law  is  a  good  illustra- 
tion of  differences  in  legal  capacity.  At  first  merchants 
were  a  special  class  having  special  privileges  and  subject 
to  special  duties,  and  the  mercantile  law  so  far  as  it  ex- 
isted was  administered  in  special  courts  {e.g.  the  Staple 
and  Piepoudre);  in  the  second  period  the  mercantile  law 
consisted  of  a  body  of  customs  which  must  be  proved  as 
facts,  and  were  binding  only  upon  the  special  class  of  mer- 


422  ELEMENTS  OF   POLITICAL   ECONOMY 

chants ;  in  the  third  period  these  customs  were  incorpo- 
rated in  the  general  law  and  made  binding  on  all,  whether 
merchants  or  not  (Smith's  Mercantile  Law^. 

It  may  be  observed  that  the  tendency  of  legislation  in 
progressive  societies  has  been  to  abolish  the  special  rights 
and  duties  of  special  classes  as  regards  making  and  en- 
forcing contracts. 

(c)  The  government  may  make  certain  requirements 
of  form  essential  to  the  enforcement  of  certain  contracts. 
The  contrast  between  ancient  and  modern  conceptions  of 
contracts  as  giving  rights  of  action  is  remarkable  and 
instructive.  "  According  to  the  modern  conception  of 
contract,  all  agreements  which  satisfy  certain  conditions 
of  a  general  kind  are  valid  contracts  and  may  be  sued 
upon  in  the  absence  of  any  special  legislation  forbidding 
particular  contracts  to  be  made,  or  denying  validity  to 
them  unless  made  with  particular  forms  "  (Pollock). 
Ancient  law,  on  the  other  hand,  regards  only  formal  con- 
tracts. "The  fundamental  assumption  of  ancient  law 
(when  it  has  got  so  far  as  to  recognise  contract  at  all)  is 
that  the  validity  of  a  contract  depends,  not  upon  the  sub- 
stance of  the  transaction,  but  upon  its  form.  The  rule  is 
that  formal  contracts  only  can  be  sued  upon ;  the  want  of 
any  part  of  the  formalities  is  fatal ;  the  fulfilment  of  them 
is  conclusive"  (Maine). 

No  better  instance  could  be  given  of  the  extension  of 
the  liberty  of  individuals  or  the  diminution  of  the  sphere 
of  state  control.  In  modern  times  the  enforcement  of 
particular  forms  is  generally  either  for  the  purposes  of 
revenue,  as  in  the  stamp  duties,  or  of  registration  —  the 
ultimate  object  being  not  restriction,  but  publicity.     The 


ECONOMIC   FUNCTIONS  OF   GOVERNMENT        423 

form  as  such  is  of  no  importance  ;  the  decisive  consideration 
is  the  intention  of  the  parties,  or  the  intention  of  the  State. 

(c?)  The  government  may,  however,  make  compulsory 
in  contracts  certain  require7ne7its,  not  only  of  form  but  of 
substance.  In  no  contract^  whether  dealing  with  land  or 
any  other  subject-matter,  do  the  parties  express  in  extenso 
all  the  rights  and  obligations  involved.  Certain  provi- 
sions are  held  to  be  applied  by  the  law,  general  or  special. 
It  may  be  observed,  however,  that  save  in  specially  ex- 
cepted cases  persons  are  at  liberty  to  contract  themselves 
out  of  the  particular  obligations  imposed  (otherwise)  by 
statute.  And  a  law  which  admits  of  "contracting  out" 
generally  remains  a  counsel  of  perfection,  or  at  best  pro- 
vides a  legal  interpretation  in  case  of  need. 

The  cases,  however,  in  which  evasion  of  this  kind  is  not 
permitted,  are  in  modern  States  both  numerous  and  impor- 
tant. In  the  contracts  in  use  in  most  great  industries  — 
in  agriculture,  mining,  manufactures,  fisheries,  railways, 
navigation  —  the  legislature  has  made  certain  clauses 
compulsory,  and  has  prohibited  the  insertion  of  others. 

This  method  of  interference  also  has  its  limitations. 
If  the  government  attempts  too  much,  having  regard  to 
the  ideas,  customs,  or  prejudices  of  the  times,  either 
by  way  of  compulsion  or  prohibition,  the  law  is  either 
evaded  by  the  parties  affected  or  nullified  by  its  admin- 
istrators. 

5.  The  Methods  of  Governmental  Action.  —  («)  The 
government  may  itself  assume  the  position  of  a  monopolist 
as  regards  certain  industries  or  economic  services.  This 
case  differs  from  that  first  noticed,  namely,  regulation  by 
penalties,  in  that   government  not  only  prohibits  others. 


424  ELEMENTS   OF   POLITICAL   ECONOMY 

but  itself  performs.  The  freedom  of  the  individual  is 
equally  restricted,  but  the  government  takes  away  the 
real  burden  of  restriction  by  itself  satisfying  the  economic 
w^ant.  Thus  the  post-office  has  a  monopoly  of  letter-carry- 
ing, but  most  people  look  on  this  monopoly  as  advanta- 
geous. Again,  the  government  prohibits  private  coinage, 
and  again  also  confers  a  benefit  by  the  prohibition. 

The  assumption  of  monopolies  by  governments  (with 
the  exceptions  noted),  and  still  more  the  delegation  of  such 
powers  by  patents  to  individuals,  has  in  the  course  of  time 
been  greatly  diminished. 

(6)  The  government  may  undertake  certain  kinds  of 
husmess,  but  at  the  same  time  allow  private  enterprise  to 
compete,  as,  for  example,  in  providing  for  religious  services, 
or  for  the  conveyance  of  parcels.  In  this  case — that  of 
governmental  management  side  by  side  with  private  enter- 
prise —  the  only  element  of  compulsion  consists  in  the  co- 
ercive levying  by  taxation  (as  in  church  tithes)  of  the  funds 
required  for  carrying  on  the  business,  and  when  the  busi- 
ness can  be  made  to  pay  its  own  expenses  (as  with  the 
parcel  post)  even  this  element  of  coercion  vanishes.  In 
forming  an  estimate  of  cost,  however,  it  is  important  to 
take  into  account  all  the  indirect  expenses  and  supple- 
mentary charges. 

((?)  The  government  may  intervene  simply  to  carry  out 
the  wishes  of  the  parties  concerned  (as,  for  example,  in 
providing  official  arbitration).  A  great  part  of  the  law  of 
every  State  is  intended  simply  to  provide,  or  enforce,  set- 
tled rules,  e.g.  the  rule  of  the  road  on  land  or  sea.  What 
the  rule  is,  is  often  a  matter  of  indifference,  provided  only 
it  is  fixed  and  known. 


ECONOMIC   FUNCTIONS  OF   GOVERNMENT        425 

The  principle  of  the  hiw  of  inheritance  (when  freedom 
of  bequest  is  allowed)  is  in  case  of  intestacy  to  carry  out 
the  supposed  wishes  of  the  deceased. 

The  laws  of  bankruptcy  are  in  some  respects  similar 
to  the  laws  of  compulsory  inheritance.  The  bankrupt 
is  so  far  civilly  dead,  and  the  State  lays  down  the  rules 
for  distribution  of  his  estate  amongst  the  creditors.  If  it 
be  supposed  that  the  creditors  wish  for  a  just  distribution, 
the  State  only  carries  out  their  wishes. 

(c?)  The  government  may  provide  for  the  erection  and 
maintenance  of  various  public  ivories  and  institutions,  for 
the  provision  of  which  private  enterprise  is  unequal.  This 
is  the  case  which  was  dealt  with  very  fully  by  Adam 
Smith,  and  in  our  own  time  is  being  pushed  to  an  extreme 
by  socialists.  It  is  a  very  large  case,  especially  in  the  guise 
of  municipal  trading  and  poor  relief.  The  limitations  to 
governmental  and  municipal  work  of  this  kind  are  found 
partly  in  the  limits  to  taxation  or  other  sources  of  revenue, 
—  if  the  works  and  institutions  are  not  self-supporting,  — 
and  partly  in  the  limits  to  public  expenditure  which  must 
conform  to  certain  general  principles.    (See  Chapter  VIII.) 

Before  considering  the  degree  and  nature  of  the  limits 
imposed  by  public  finance,  it  is  necessary  to  notice  briefly 
certain  limitations  of  a  general  character,  which  are  appli- 
cable to  all  kinds  of  governmental  control. 

6.  General  Limitations  to  Governmental  Interference.  — 
With  the  best  intentions,  governments  may  ruin  their  leg- 
islation by  ignorance  and  their  administration  by  feeble- 
ness. The  government,  even  of  the  most  democratic 
states,  must  be  formed  of  persons  who  are  themselves  liable 
to  errors  of  judgement  and  errors  of  passion.     And  to  a 


426  ELEMENTS  OF  POLITICAL  ECOXOMY 

considerable  extent  they  are  supposed  to  carry  out  the 
mandate  of  their  electors.  The  electors  are  open  to  all 
kinds  of  persuasion,  as  well  as  to  the  persuasion  of  justice 
and  reason.  In  the  most  advanced  democracies,  laws  are 
still  made  and  unmade  in  the  interests  of  powerful  classes, 
and  sometimes  against  the  interests  of  considerable  minori- 
ties. Officials  are  still  appointed  for  all  sorts  of  reasons 
apart  from  merit  and  efficiency,  and  are  removed,  or  not 
removed,  on  a  similar  diversity  of  excuses.  The  one  and 
sufficient  explanation  of  these  shortcomings  is,  that  gov- 
ernment is  carried  on  by  men,  and  all  men  are  imperfect. 

Governmental  interference  is  always  in  danger  of  one 
horn  of  a  dilemma.  If  the  individual  official  is  left  free  to 
exercise  his  own  judgement,  there  is  the  danger  of  caprice 
or  jobbery,  or  simple  foolishness  ;  if  his  freedom  is  cur- 
tailed, he  must  act  by  routine,  and  routine  is  not  adapted 
to  the  ever  changing  conditions  of  modern  societies. 

Another  limitation  in  lawmaking  is  found  in  the  endur- 
ance of  the  laws.  Laws  are  now  generally  held  to  con- 
tinue in  force  until  they  are  definitely  repealed.  Thus,  a 
law  passed  under  popular  excitement  caused  by  temporary 
circumstances  may  become  a  nuisance  before  it  has  well 
got  into  operation.  If  the  endurance  of  laws  has  its  ad- 
vantages —  if  every  generation  of  reformers  can  only  hope 
to  provide  the  necessary  marginal  increments  —  it  has  its 
disadvantages,  especially  in  progressive  societies. 

If  a  law  is  passed,  or  the  government  otherwise  interferes 
in  favour  of  one  set  of  persons,  it  must  be  prepared  by  the 
principle  of  formal  justice  or  uniformity  to  extend  simi- 
lar action  to  all  similar  cases.  As  far  as  the  letter  of  the 
law  permits  the  courts  will  make  the  extension  ;  and  justice 


ECONOMIC  FUNCTIONS  OF  GOVERNMENT        427 

goes  beyond  the  letter  of  the  law.  Hence  the  danger  of 
creating  precedents.  The  most  effective  limit  to  public 
expenditure  and  to  the  assumption  of  new  duties  by  tlie 
State,  is  the  knowledge  on  the  part  of  the  government 
that  the}'  must  be  prepared  to  apply  the  same  principle  to 
all  similar  cases. 

Every  increase  ^»^  the  power  of  government  and  every 
extension  of  governmental  interference  increases  the  pas- 
sibility  of  abuses.  Appointments  may  be  given  or  with- 
drawn, not  on  account  of  fitness  or  incapacity,  but  for 
services  to  a  political  party.  Power  granted  for  one  pur- 
pose may  be  misdirected  to  other  purposes  in  the  interest 
of  the  dominant  political  class ;  for  even  with  the  most 
effective  representative  systems  the  cabinet  has  very  great 
power.  There  may  be  wasteful  expenditure  under  the 
influence  of  popular  sentiment ;  the  machinery  of  govern- 
ment may  be  overburdened  with  work,  and  with  the  nicest 
adjustment  of  delegated  authority  some  central  control  is 
always  necessary.  The  self-interest  of  officials  may  be 
opposed  to  the  interests  of  the  public,  and  reward  by  hon- 
ours and  promotion  depends  for  its  effectiveness  on  the 
wisdom  of  selection. 

The  authoritative  prohibition  of  any  course  of  conduct 
so  far  involves  a  limitation  of  freedom,  and  it  may  well 
happen  that  there  will  be  no  corresponding  extension  of 
freedom  in  other  directions.  On  the  principle  of  utility, 
the  loss  of  freedom  may  too  readily  be  held  to  be  compen- 
sated by  a  gain  of  happiness  in  something  else  and  by 
somebody  else.  But  the  loss  of  freedom  tends  to  starve 
the  development  of  character,  and  in  the  words  of  jNIill, 
unless  the  conscience  of  the  individual  goes  freely  with  the 


428  ELEMENTS   OF   TOLITICAL   ECONOMY 

legal  restraint,  it  partakes  either  in  a  great  or  in  a  small 
degree  of  the  degradation  of  slavery. 

It  is  sometimes  supposed  that  a  government  of  the 
people  by  the  people  or  their  representatives  is  altogether 
different  from  a  despotism ;  and  that  under  what  is  called 
a  free  government  every  individual  must  be  free.  This 
vague  language  will  not  bear  analysis,^  and  the  idea  which 
it  is  supposed  to  express  has  been  forcibly  exposed  by 
Mill.  "It  is  no  less  important  in  a  democratic  than  in 
any  other  government  that  all  tendency  on  the  part  of 
public  authorities  to  stretch  their  interference  and  assume 
a  power  of  any  sort  that  can  readily  be  dispensed  with 
should  be  regarded  with  unremitting  jealousy.  Perhaps 
this  is  even  more  important  in  a  democracy  than  in  any 
other  form  of  political  society ;  because  where  public 
opinion  is  sovereign,  an  individual  who  is  oppressed  by 
the  sovereign  does  not,  as  in  most  other  states  of  things, 
find  a  rival  power  to  which  he  can  appeal  for  relief  or  at 
all  events  for  sympathy."  And  again :  "  In  some  coun- 
tries the  dream  of  the  people  is  for  not  being  tyrannised 
over,  but  in  others  it  is  merely  for  an  equal  chance  to 
everybody  of  tyrannising.  Unhappily,  this  last  state  of 
the  desires  is  fully  as  natural  to  mankind  as  the  former, 
and  in  many  of  the  conditions  even  of  civilised  humanity 
is  far  more  largely  exemplified."  ^ 

1  "That  the  condition  of  a  slave  is  better  under  an  arbitrary  than 
under  a  free  government  is,  I  believe,  supported  by  the  history  of  all  ages 
and  nations."  —  Adam  Smith,  p.  264. 

2  This  chapter  is  greatly  abbreviated  from  Rook  V,  Chaps.  I-IV,  in  the 
Principles.  See  Sidgwick,  Political  Economy,  Book  III ;  Elements  of 
Politics,  Chap.  IV ;  Mill,  Political  Economy,  Book  V,  Chap.  XI ;  Wealth  of 
Motions,  Book  V  ;  Bosanquet,  Philosophical  Theory  of  the  State,  Chap.VI. 


CHAPTER   II 

CHARACTER    AND   DEFINITION   OF   TAXATION 

1.   The  General  Characteristics  of  Taxation.  —  (a)  The 

principles  of  taxation  are  well  adapted  for  the  application 
of  the  historical  method.  Instead  of  deriving  the  modern 
conception  of  taxation  from  the  modern  conception  of 
sovereignty,  we  may  trace  the  historical  evolution  of  the 
principal  characteristics.  As  in  other  cases,  the  conti- 
nuity and  variety  of  English  economic  history  may  be 
trusted  to  furnish  evidence  of  the  principal  stages.  The 
most  general  feature  of  taxation,  that  marks  it  off  plainly 
from  other  payments  (in  money,  kind,  or  services),  is 
that  the  payment  is  coynpulsory.  A  tax  is  an  exaction 
levied  by  superior  force ;  it  is  not  the  result  of  charity, 
persuasion,  request,  or  contract,  although  these  names  and 
sometimes  the  ideas  which  they  stand  for  have  been  used 
to  disguise  or  modify  the  original  compulsion. 

Too  much  is  made  of  the  names  assumed  by  early  forms 
of  taxes  —  the  "gentle  terms"  donuni  and  auxilium. 
There  were,  indeed,  at  times  a  few  "  gifts  "  in  answer  to 
the  "prayers"  of  the  king;  but  the  prayers  were  in  gen- 
eral of  the  quihus  non  contradici  order,  and  the  gifts  were 
like  the  "precarious"  services  of  servile  tenants,  or  tlie 
boon  works  at  the  prayer  of  the  lord  (^ad  precem^,  which 
Seebohm  regards  as  the  most  distinctive  mark  of 
subjection. 

The  most  noteworthy  characteristic  of  mediaaval  taxes 

429 


430  ELEMENTS  OF  POLITICAL  ECONOMY 

is  that,  levied  first  as  proportionate  and  variable  rates, 
they  became  fixed  and  customary  —  as  in  the  case  of  the 
tenths  and  fifteenths,  which  came  to  mean  a  certain  aggre- 
gate sum. 

The  principal  modifications  in  this  element  of  compul- 
sion are  found  in  the  gradual  transfer  of  the  compelling 
right  to  the  House  of  Commons,  and  it  may  truly  be  said 
that  the  more  effective  the  representation  so  much  the 
more  effective  became  the  compulsion. 

(5)  The  compulsion  of  taxation  is,  however,  really 
modified  when  evasion  is  wholly  or  partially  possible. 
That  a  tax  that  can  be  evaded  will  be  evaded  may  be  illus- 
trated to  the  extent  of  an  inductive  proof.  The  evasion 
may,  as  Professor  Seligman  remarks,  be  illegitimate,  as  in 
smuggling  or  false  declarations  of  income,  or  legitimate, 
as  when  the  taxed  commodity  or  process  or  service  is 
avoided.  Evasion  in  the  first  case  is  met  by  various  pen- 
alties and  preventions,  and  for  scientific  purposes  an 
evaded  tax  of  this  kind  is  no  tax. 

Evasion  of  the  second  kind,  however,  is  not  so  complete. 
It  is  sometimes  said  that  a  tax  upon  commodities  is  vol- 
untary, because  the  consumers  may  refrain  from  con- 
sumption or  resort  to  other  things.  Leaving  aside  the 
impracticable  remedy  of  the  taxation  of  all  possible  sub- 
stitutes, taxes  of  this  kind  have  always  an  element  of 
compulsion.  It  is  true  that  a  man  may  escape  the  to- 
bacco duty  by  not  smoking  (as,  indeed,  he  may  escape  the 
income  tax  by  not  earning  sufficient  income),  but  his 
natural  or  acquired  inclination  to  smoke  is  (as  shown 
by  the  revenue)  sufficient  to  outweigh  the  pleasure  of 
evasion. 


CHARACTER  AND  DEFINITION  OF  TAXATION     431 

The  legitimate  evasion  of  taxes  on  productive  processes 
in  some  cases  leads  to  improvements  and  inventions,  but 
in  general  the  necessities  of  fiscal  supervision  by  stereo- 
typing old  methods  prevent  natural  progress.  The  neces- 
sity of  taxation  is  only  the  stepmother  of  invention. 

(c)  The  objects  for  which  taxes  are  imposed  are  coex- 
tensive with  the  objects  of  public  expenditure. 

In  the  course  of  progress  we  find  that  special  taxation 
for  special  purposes  has  given  way  to  general  taxation 
for  general  purposes.  The  method  of  assigning  particular 
revenues  for  particular  expenses  (e.g.  the  aids  for  making 
the  king's  son  a  knight,  or  marrying  his  eldest  daughter) 
has  generally  fallen  into  decay,  although  it  still  survives 
in  local  taxation,  and  there  are  occasional  reversions  to 
this  older  method.  Even  in  local  taxation,  however,  it 
has  come  to  be  recognised  that  special  rates  for  special 
services  are,  in  many  ways,  uneconomical  (e.g.  separate 
rates  for  schools,  poor,  roads,  police,  etc.). 

(f?)  Payments,  however,  may  be  made  to  government 
which  are  only  partially  of  the  nature  of  taxes.  Such, 
for  example,  are  the  prices  paid  by  the  consumers  of  com- 
modities sold  by  the  State,  and  fees  for  services  rendered. 
If  the  State  has  a  monopoly  and  fixes  prices  or  fees  above 
what  would  be  the  case  with  natural  competition,  the 
extra  price  or  fee  is  of  the  nature  of  a  tax.  If  the  State 
competes  with  other  agencies  and  charges  only  competi- 
tive rates,  this  element  of  direct  taxation  vanishes.  If, 
as  is  often  the  case,  the  State  charges  less  than  cost  price 
(including  supplementary  costs),  the  deficit  must  be  met 
by  other  taxes,  and  itself  is  of  the  nature  of  a  bounty  on 
consumption. 


432  ELEMENTS  OF  POLITICAL  ECONOMY 

(e)  In  modern  times  the  revenues  of  the  State  that 
imitate  most  nearly  voluntary  contributions  for  the  public 
services  are  those  derived  from  public  loans.  To  meet 
extraordinary  expenditure  (as  in  war)  a  loan  is  contracted, 
and  subscription  to  the  loan  is  voluntary.  The  element 
of  compulsion,  however,  is  only  transferred  from  the  pres- 
ent to  the  future  taxpayer.  Interest  and  principal  can 
only  be  paid  out  of  future  taxes. 

(/)  Taxes  are  nominally  imposed  upon  various  forms 
of  wealth  in  the  widest  sense,  but  all  taxation  is  really 
imposed  on  persotis.  This  proposition  is  derivative  from 
the  general  conception  of  wealth.  One  of  the  essential 
marks  of  wealth  is  appropriation,  and  taxation  is  a  pro- 
cess of  transferring  wealth  from  private  individuals  to  the 
state.  Every  public  tax  diminishes  so  far  the  wealth  of 
private  individuals.  It  is  of  course  true  that  in  most  cases 
there  is  some  set-off  to  the  disutility  of  taxation  in  the 
utility  of  the  government,  and  the  utility  may  exceed  the 
disutility  even  to  the  particular  payer.  Occasionally, 
also,  the  imposition  of  a  tax  may  indirectly  benefit  certain 
persons,  as  in  the  typical  case  of  protective  duties. 

It  is,  however,  in  a  general  survey,  best  to  look  on  tax- 
ation as  involving  in  itself  a  contribution  on  the  part  of 
persons  on  the  compulsion  of  the  State,  and  to  consider 
separately  the  benefits  of  public  expenditure,  and  also  the 
economic,  constitutional,  and  other  limitations  imposed  on 
the  exercise  of  this  compelling  power. 

Professor  Bastable's  definition  of  taxation  sums  up  in 
a  convenient  form  the  principal  results  of  the  foregoing 
analyses,  "  A  tax  is  a  compulsory  contribution  of  the 
wealth  of  a  person,  or  body  of  persons,  for  the  services  of 


CHARACTER   AND   DEFINITION   OF   TAXATION     433 

the  public  powers.''''  If  the  State  is  already  the  owner  of 
all  the  forms  of  wealth  that  it  requires,  no  taxation  is  nec- 
essary ;  if  it  requires  more  wealth,  it  must  make  it  (indus- 
trial domain),  or  take  it  (taxation). 

It  may  be  observed  that  what  is  first  imposed  as  a  tax 
tends  to  become  in  some  cases  a  form  of  state  ownership. 
A  land  tax  regarded  as  perpetual  becomes  a  rent  charge 
owned  by  the  State.  Thus  the  expression  that  an  old  tax 
is  no  tax  really  means,  in  this  case,  that  taxation  has  been 
merged  in  state  ownership.  The  real  incidence  of  the 
original  tax  is  upon  the  original  owner ;  at  the  imposition 
of  the  tax  the  value  of  his  property  is  diminished  by  the 
capital  value  of  the  tax. 


2p 


CHAPTER  III 

THE   CANONS   OF   TAXATION 

1.   Adam  Smith's  Canons  of  Taxation :  First,  Equality.  — 

The  treatment  of  the  general  principles  of  taxation  may- 
well  begin  with  a  critical  analysis  of  Adam  Smith's  cele- 
brated canons.  The  first  canon,  Equality  of  Taxation^ 
stated  in  full,  is  found  to  contain  the  germs  of  several  dis- 
tinct theories  of  what  constitutes  equal  or  just  or  equitable 
taxation. 

"  The  subjects  of  every  State  ought  to  contribute  toward 
the  support  of  its  government,  as  nearly  as  possible  in 
proportion  to  their  respective  abilities,  that  is,  in  propor- 
tion to  the  revenue  which  they  respectively  enjoy  under 
the  protection  of  the  State.  The  expense  of  government 
to  the  individuals  of  a  great  nation  is  like  the  expense  of 
management  to  the  joint  tenants  of  a  great  estate,  who 
are  all  obliged  to  contribute  in  proportion  to  their  respec- 
tive interests  in  the  estate.  In  the  observation  or  neglect 
of  this  maxim  consists  what  is  called  the  equality  or  ine- 
quality of  taxation.  Every  tax,  it  must  be  observed  once 
for  all,  which  falls  finally  upon  one  only  of  the  three  sorts  of 
revenue  above  mentioned  (viz.  rent,  wages,  profits)  is 
necessarily  unequal  so  far  as  it  does  not  affect  the  other 
two.  In  the  following  examination  of  different  taxes  I 
shall  seldom  take  much  further  notice  of  this  sort  of  ine- 
quality, but  shall  in  most  cases  confine  my  observations  to 

434 


THE  CANONS  OF  TAXATION         435 

that  inequality  which  is  exercised  by  a  particular  tax  fall- 
ing unequally  upon  that  particular  sort  of  private  revenue 
which  is  affected  by  it." 

To  begin  Avith,  the  use  of  the  phrase  "the  subjects 
ought "  implies  that  it  is  the  duty  of  the  subject  to  con- 
tribute, and  the  right  of  the  sovereign  to  impose,  taxes. 
Thus  the  right  of  taxation  may  be  derived  directly  from 
the.  conception  of  sovereignty  —  which  brings  to  view  the 
compulsory  character  of  the  contribution. 

This  doctrine  of  sovereignty  as  the  basis  of  taxation 
finds  important  illustrations  in  history.  Taxes  have  been 
imposed,  not  for  the  value  of  the  real  revenue  they  may 
bring  in,  nor  from  any  idea  of  public  advantage,  nor  even 
for  the  private  advantage  of  the  monarch  or  other  persons 
in  authority,  but  simply  to  show  to  the  subjects  the  right 
of  the  sovereign.  It  was  the  determination  to  insist  on 
this  barren  and  malignant  sovereign  right  which  led  to 
the  retention  by  the  British  government  of  the  threepence 
per  pound  duty  on  tea,  "  that  figment  of  a  tax,  that  pep- 
percorn rent,"  and  of  the  stamp  duties  that  never  paid  the 
cost  of  collection  —  "  shearing  the  wolf  "  —  that  lost  the 
British  the  American  colonies. 

It  is  not  often,  however,  especially  in  modern  times, 
that  the  pure  and  simple  doctrine  of  sovereignty  is  con- 
sidered sufficient  authority  for  taxation.  The  Americans 
(and  on  their  side  were  some  of  the  greatest  of  English 
statesmen)  opposed  to  this  absolute  doctrine  the  great 
constitutional  rule,  that  taxation  ought  to  be  coincident 
with  representation  —  that  only  those  who  shared  in  the 
power  should  be  called  on  to  bear  the  burdens  of  government, 
a  position  heartily  approved  of  by  Adam  Smith,  and  made 


436  ELEMENTS   OF   POLITICAL   ECONOMY 

by  him  the  basis  of  his  great  scheme  of  imperial  federa- 
tion. 

The  whole  course  of  constitutional  history  is  marked 
by  the  struggle  of  the  payers  of  taxes  for  the  control 
of  taxation.  And  taking  a  general  view,  it  may  be  said 
that  the  burden  of  taxation  tends  to  fall  most  lightly  on 
those  who  have  the  greatest  political  power. 

The  doctrine  of  sovereignty  as  the  basis  of  taxation, 
logically  carried  out,  results  in  the  maxim  that  a  govern- 
ment should  impose  such  taxes  as  are  "  most  easily  as- 
sessed and  collected"  (McCulloch).  Just  as  a  general 
looks  to  the  efficiency  of  his  army  as  a  whole,  and  is  j)re- 
pared  to  sacrifice  any  portion  if  necessar}^,  so  it  may  be 
said  that  the  State  should  not  regard  the  particular  inter- 
ests of  individuals,  but  rather  consider  the  power  of  the 
State  as  a  whole  and  what  is  most  conducive  to  that 
power.  In  times  of  national  peril,  when  the  political 
existence  of  the  State  is  concerned,  this  view  seems  to 
meet  with  general  acquiescence.  But  in  ordinary  times 
in  the  modern  State,  such  a  complete  sacrifice  of  the  in- 
dividual is  never  contemplated,  and  the  sovereign  power 
in  taxation  is  supposed,  even  on  McCuUoch's  view,  to  be 
used  in  the  way  "  most  conducive  to  the  public  interests." 
And  since  one  of  the  primary  public  needs  is  the  equitable 
treatment  of  individuals,  we  advance  from  the  general 
proposition  that  the  subjects  ought  to  contribute  to  the 
support  of  the  government,  to  the  important  qualification, 
that  they  should  do  so  "  as  nearly  as  possible  in  proportion  to 
their  respective  abilities^  Adam  Smith  goes  on  to  explain, 
that  the  measure  of  abilities,  in  his  view,  is  the  revenue  en- 
joyed under  the  protection  of  the  State,  and  thus  the  nat- 


THE  CAXONS  OF  TAXATION         437 

ural  result  of  his  first  canon  is  that  taxation  should  be 
proportionate  to  revenue.  But  this  simple  interpretation 
has  not  always  been  accepted. 

2.  Equality  of  Sacrifice.^  —  The  critical  examination  of 
the  term  abilities  discloses  two  very  different  bases  of 
taxation,  wliich  may  be  described  provisionally  as  subjec- 
tive and  objective,  according  as  stress  is  laid  on  the  iticon- 
venience  or  disutility/  involved  in  the  payment  of  taxes  on 
the  one  side,  or,  on  the  other,  on  the  ability  or  faculty  of 
the  taxpayer  as  indicated  by  his  property  or  income.  The 
development  of  the  subjective  basis  of  taxation  leads  to 
the  principle  of  equality  of  sacrifice.  "  Equality  of  taxa- 
tion," says  Mill,  "  as  a  maxim  of  politics,  means  apportion- 
ing the  contribution  of  each  person  toward  the  expenses 
of  government,  so  that  he  shall  feel  neither  more  nor  less 
inconvenience  from  his  share  of  the  payment  than  every 
other  person  experiences  from  his."  Mill  points  out  that 
this  standard,  like  other  standards  of  perfection,  cannot  be 
completely  realised,  but  it  is  put  forward  as  the  principal 
ground  of  various  practical  modifications  of  systems  of 
taxation. 

In  the  first  place  it  may  be  urged  that  if  taxation  in  the 
case  of  A  leads  to  a  sacrifice  of  "  necessaries,"  whilst  in 
that  of  B  the  sacrifice  is  only  of  "  superfluities  "  or  "  luxu- 
ries," the  burden  of  A  is  infinitely  greater.  And  since  we 
can  never  establish  equality  between  the  infinite  and  the 

^Cf.  Edgeworth,  "  Pure  Taxation,"  Part  III,  Economic  Journal,  De- 
cember, 1897,  for  a  very  able  and  learned  discussion  of  the  sacrifice  theory 
of  taxation  on  utilitarian  principles.  He  prefers  to  state  the  ideal  as 
"  minimum  "  sacrifice  instead  of  equal,  and  this  statement  seems  the  more 
logical  on  the  pure  utilitarian  theory.  On  grounds  of  formal  justice  the 
equality  of  sacrifice  may  be  preferred. 


438  ELEMENTS  OF  POLITICAL  ECONOMY 

finite,  it  follows  as  a  practical  maxim  that  the  necessary 
minimum  of  income  must  be  exempt  altogether. 

This  principle  of  a  free  minimum  income  has  been  par- 
tially applied  in  the  United  Kingdom :  firsts  in  the  aboli- 
tion of  most  taxes  on  such  necessaries  as  food,  clothing, 
fuel ;  and  secondly,  in  the  exemption  from  direct  taxes  of 
incomes  below  a  certain  minimum  and  also  of  savings  in 
the  shape  of  insurance.  But  as  regards  indirect  taxation 
in  general,  it  may  be  said  that  a  considerable  part  of  the 
revenue  from  stimulants  (alcohol,  tobacco,  and  tea)  is  de- 
rived from  persons  whose  incomes  are  below  what  is  gen- 
erally considered  a  reasonable  minimum  for  the  standard 
of  comfort ;  and  the  same  thing  is  true  of  some  forms  of 
direct  taxes,  e.g.  various  local  rates. 

And  however  plausible  the  doctrine  of  a  free  minimum 
income  may  appear,  it  is  always  limited  by  the  great  prac- 
tical rule  that  taxes  must  be  productive. 

The  principle  of  equality  of  sacrifice  is  also  advanced 
in  support  of  graduated,  or  progressive,  taxation.  And  at 
first  sight  —  having  regard  to  the  law  of  diminishing  utility 
—  equality  of  sacrifice  seems  necessarily  to  lead  to  progres- 
sion. We  may  suppose  that  the  more  money  any  person 
has  (whether  as  capital  or  income)  the  less  is  the  utility 
to  him  of  successive  increments,  and  therefore  the  less  the 
disutilities  of  decrements  caused  by  taxation.  It  seems  to 
follow  that  a  greater  amount  should  be  taken  from  the  rela- 
tively rich,  and  that  a  merely  equal  percentage  would  not 
involve  equal  real  sacrifice. 

It  is,  however,  one  thing  to  admit  that  equal  percent- 
ages do  not  involve  equal  real  sacrifices,  and  quite  another 
to  formulate  any  rational  scheme  of  progression  merely  on 


THE  CANONS  OF  TAXATION  439 

the  theory  of  utility  and  disutility.  "  The  economic  cal- 
culus is  not  at  present  competent  to  deal  with  such  com- 
parisons (e.g.  the  real  sacrifices  involved  in  the  taxation 
of  different  incomes).  The  weightiest  difficulty  that  the 
theoretical  advocates  of  progression  have  to  meet  is  the 
essentially  subjective  nature  of  their  standard.  The  trans- 
lation into  an  objective  rule  of  taxation  can  only  be  ac- 
complislied  by  the  aid  of  assumptions  as  to  the  relations 
of  enjoyment  in  different  classes  that  must  contain  a  large 
element  of  conjecture.  The  modern  developments  of  the 
theory  of  utility  fail  to  supply  any  definite  practical  basis 
on  which  to  frame  a  scale  of  progression  "  (Bastable). 

The  opinion  of  Professor  Seligman  to  the  same  effect 
is  also  worthy  of  citation,  especially  as  on  other  general 
grounds  he  is  inclined  to  support  the  principle  of  progres- 
sion. "  The  imposition  of  equal  sacrifices  on  all  taxpayers 
must  always  remain  an  ideal  impossible  of  actual  reali- 
sation. Sacrifice  denotes  something  psychical,  something 
psychological.  A  tax  takes  away  commodities  which  are 
something  material,  something  tangible.  The  sacrifice 
occasioned  by  a  tax  is  only  one  factor  in  the  problem, 
and  may  be  a  minor  factor." 

It  is  alleged  that  a  tax  on  income  ought  to  vary  accord- 
ing to  the  source  of  the  income  —  that,  in  particular,  in- 
comes from  realised  wealth,  e.g.  land,  should  be  taxed  at 
a  higher  rate  than  incomes  from  talent,  and  professional 
and  business  capacity  —  or  more  generally,  that  terminable 
incomes  should  be  taxed  at  a  lower  rate  than  perpetual  in- 
comes. In  its  practical  form  this  discrimination  is  justi- 
fied on  the  particular  ground  that  the  professional  man 
is  obliged  to  put  aside,  by  way  of  insurance  for  himself 


440  ELEMENTS   OF   POLITICAL   ECONOMY 

or  his  family,  a  larger  proportion  of  his  terminable  income. 
Thus  there  is  a  smaller  free  income  from  which  to  pay  the 
tax,  and  consequently  a  greater  sacrifice.  It  may  be  ob- 
served that  in  the  English  income  tax  exemptions  on  the 
ground  of  insurance  were  reintroduced  by  Mr.  Gladstone 
in  1853,  and  have  since  been  continued. 

The  exemption  of  a  part  of  the  income  saved  for  insur- 
ance shows  very  well  the  difficulties  of  discrimination. 
This  exemption  discriminates  between  forms  of  invest- 
ing savings  in  favour  of  one ;  if  a  man  invests  part  of 
his  income  in  higher  education  for  his  children,  or  in 
buying  his  house  or  farm  by  instalments,  or  in  any  of 
the  multitude  of  other  indirect  modes  of  providing  for 
the  objects  of  insurance,  he  has  logically  an  equal  claim 
to  exemption,  but  practically  he  obtains  none. 

3.  The  Faculty  Theory  of  Taxation.  —  The  development 
on  the  objective  side  of  Adam  Smith's  position,  that  the 
subjects  ought  to  contribute  in  proportion  to  their  abilities, 
leads  to  the  faadty  theory.  "  The  faculty  theory  of  taxa- 
tion is  very  old.  The  word  faculty  is  the  usual  one  in 
Latin  and  French  for  tax  laws,  and  is  the  general  term 
employed  in  all  the  early  American  laws.  For  a  long 
time,  however,  the  best  practical  test  of  faculty  was  sup- 
posed to  be  general  property.  Thus  all  through  the  Mid- 
dle Ages,  when  local  taxes  were  levied  at  all,  they  were 
assessed  on  general  property,  on  the  principle  juxta  bono- 
rum  facultatem,  or  pro  bonorum  facilitate "  (Seligman). 
In  England  the  word  ability  is  first  used  in  a  general 
statute  in  the  Elizabethan  poor  law,  —  "  according  to  the 
ability  of  the  parish,"  —  ability  being  interpreted  to  mean 
property.      Later  on,  from  meaning  property,  ability  or 


THE  CANONS  OF  TAXATION         441 

faculty  came  to  mean  income,  and  Adam  Smith  explains 
abilities  to  mean  revenues. 

The  great  merit  of  the  faculty  theory  is  that  it  substi- 
tutes an  objective  for  a  subjective  standard.  It  does  not 
look  to  the  feelings  of  the  taxpayer,  but  to  the  money 
value  of  his  taxable  capacity.  The  State  takes  more  from 
the  rich,  not  because  they  will  feel  it  less  in  proportion, 
but  because  they  have  more  to  give. 

But  although  the  faculty  standard  is  objective,  it  does 
not  follow  that  it  is  simple,  and  what  is  the  proper  meas- 
ure of  faculty  is  still  a  subject  of  dispute  both  in  theory 
and  in  practice.  Historically  the  rule  of  simple  propor- 
tion has  been  generally  adopted.  But  it  is  worth  observ- 
ing that  this  rule  was  first  of  all  insisted  on  in  order  that 
the  property  of  various  privileged  classes  should  not  be 
exempt.  That  subjects  should  contribute  in  proportion 
to  their  revenues  was  directed  against  the  privileges  of 
the  nobility,  clergy,  and  other  favoured  classes. 

In  course  of  time,  however,  the  method  of  simple  pro- 
portion has  been  attacked  with  reference  to  both  extremes 
of  the  social  scale. 

In  the  first  place  it  has  been  maintained  that  the  mini- 
mum of  subsistence  ought  to  be  exempted,  not  as  before, 
on  account  of  the  infinite  sacrifice  involved,  but  on  purely 
economic  grounds. 

Taxation  which  diminishes  the  general  efficiency  of 
labour  diminishes  the  whole  faculty  of  the  State,  and  is 
thereby  on  the  simple  faculty  theory  suicidal. 

A  similar  argument  may  be  applied  to  capital  and 
profits.  Taxation  which  prevents  productive  capital  from 
being  restored  and  renewed  also  so  far  tends  to  diminish 


442  ELEMENTS  OF  POLITICAL  ECONOMY 

the  general  faculty  of  the  owners  or  employers  of  capital. 
Accordingly,  it  has  been  maintained  that  on  the  faculty 
theory  taxation  should  only  be  imposed  on  the  net  profits 
of  gross  incomes  and  on  the  net  value  of  property.  That 
taxation  ought,  as  far  as  possible,  to  leave  unimpaired  the 
productive  powers  of  the  society  —  including  land  as  well 
as  labour  and  capital  —  may  be  regarded  as  logically  im- 
plied in  the  faculty  theory,  and  is  practically  one  of  the 
most  important  rules  of  finance. 

But  it  does  not  follow  that  the  general  rule  is  best  ap- 
plied by  being  insisted  on  in  every  particular  case.  To 
exempt  from  taxation  a  certain  minimum  rate  of  profits 
would  mean  that  more  must  be  taken  from  the  higher 
rates,  and  thus  a  premium  would  be  placed  on  inefficiency, 
and  a  check  imposed  on  enterprise. 

The  progressive  system  may  be  supported  on  the  faculty 
theory  on  the  ground  that  "  the  facility  of  increasing  pro- 
duction often  grows  in  more  than  arithmetical  proportion. 
The  rich  man  may  be  said  to  be  subject  in  some  sense 
to  the  law  of  increasing  returns"  (Seligman).  Money 
makes  money. 

On  the  whole,  it  seems  that  on  the  faculty  theory  a 
moderate  rate  of  progression  might  be  advantageous  as 
regards  income,  as  it  has  proved  to  be  as  regards  succes- 
sion duties.  "It  is  not  very  unreasonable,"  says  Adam 
Smith,  "  that  the  rich  should  contribute  to  the  public 
expense  not  only  in  proportion  to  their  revenues,  but 
something  more  than  in  that  proportion." 

4.  Taxation  of  Unearned  Increments.  —  The  application, 
however,  of  the  simple  method  of  proportion  to  income  or 
property  may  be  further  modified  on  the  faculty  theory. 


THE  CANONS  OF  TAXATION        443 

We  may  consider  (as  before  on  the  sacrifice  basis)  not 
only  the  amounts  of  the  wealth,  but  the  sources  of  such 
wealth.  From  the -national  point  of  view,  the  best  system 
on  the  faculty  theory  is  that  which  least  impairs  the  pro- 
ductive powers  of  the  society.  Heavy  taxation  has  been 
proved  over  and  over  again  to  be  the  greatest  check  to 
industrial  development.  But  there  is  a  large  class  of 
incomes  which,  compared  with  ordinary  profits  and  wages, 
may  be  classed  as  "  unearned,"  and  it  may  be  argued  that 
taxation  of  these  incomes  does  not  impose  a  corresponding 
check  on  industry.  "  Both  ground  rents  and  the  ordinary 
rent  of  land,"  says  Adam  Smith,  "  are  a  species  of  revenue 
which  the  owner  in  many  cases  enjoys  without  any  care  or 
attention  of  his  own;  though  a  part  of  this  revenue  be 
taken  from  him  in  order  to  defray  the  expenses  of  the 
State,  no  discouragement  will  thereby  be  given  to  any  sort 
of  industry.  The  annual  produce  of  the  land  and  labour  of 
the  society,  the  real  wealth  and  revenue  of  the  great  body 
of  the  people,  might  be  the  same  after  such  a  tax  as  before. 
Ground  rents  and  the  ordinary  rent  of  land  are,  therefore, 
perhaps,  the  species  of  revenue  which  can  best  bear  to 
have  a  peculiar  tax  imposed  upon  them.  Ground  rents 
seem,  in  this  respect,  a  more  proper  subject  of  peculiar 
taxation  than  even  the  ordinary  rent  of  land.  The  ordi- 
nary rent  of  land  is  in  many  cases  owing,  partly  at  least, 
to  the  attention  and  good  management  of  the  landlord. 
A  very  heavy  tax  might  discourage  too  much  this  atten- 
tion and  good  management.  Ground  rents,  so  far  as  they 
exceed  the  ordinary  rent  of  land,  are  altogether  owing  to 
the  good  government  of  the  sovereign,  which,  by  protect- 
ing the  industry  either  of  the  whole  people   or  of  the 


444  ELExMENTS   OF   POLITICAL   ECONOMY 

inhabitants  of  some  particular  place,  enables  them  to  pay- 
so  much  more  than  its  real  value  for  the  ground  which 
they  build  their  houses  upon.  Nothing  can  be  more 
reasonable  than  that  a  fund  which  owes  its  existence  to 
the  good  government  of  the  State  should  be  taxed  pecul- 
iarly, or  should  contribute  something  more  than  the  greater 
part  of  other  funds  toward  the  support  of  that  govern- 
ment." Later  on,  Adam  Smith  applies  the  principle  still 
further,  and  argues  that  the  gains  of  monopolists,  when- 
ever they  can  be  come  at,  are  certainly,  of  all  subjects,  the 
most  proper  for  taxation.  A  similar  argument  may  be 
applied  to  "  conjunctur "  profits,  and  those  portions  of 
quasi-YQxvis  that  may  be  classed  as  "  unearned." 

5.  The  Benefit  or  Social  Dividend  Theory  of  Taxation. — 
According  to  this  theory,  taxes  ought  to  be  considered  as 
payments  for  valuable  services  rendered  by  the  State  to 
individuals.  The  essence  of  this  doctrine  may  be  found 
in  Adam  Smith's  reference  to  the  revenues  which  are 
enjoyed  under  the  protection  of  the  State,  and  in  his  com- 
parison of  the  individuals  of  a  great  nation  to  the  joint 
tenants  of  a  great  estate.  It  is  easy  to  show,  as  Mill  does, 
that  if  protection  is  taken  in  its  narrowest  signification, 
as  a  matter  of  fact  the  poor  need  more  protection  than 
the  rich,  and  as  a  consequence,  that  the  protection  theory 
would  lead  to  regressive  taxation.  But  Adam  Smith's 
own  application  of  the  theory,  already  noted,  to  the  case 
of  ground  rents  and  monopolies,  shows  that  such  a  narrow 
interpretation  is  not  justifiable,  and  has,  certainly,  never 
been  appealed  to  in  practice.  The  theory  in  its  wider 
meaning  implies  that  the  State  is  a  partner  in  all  indi- 
vidual undertakings  by  providing,  not  only  for  security, 


THE  CAXONS  OF  TAXATTOX         445 

but  for  many  other  elements  necessary  and  advantageous 
to  their  development.  And  as  one  of  the  members  of 
every  industrial  partnership  the  State  is  entitled  to  a 
share  in  the  profits.  If,  however,  the  theory,  even  in  this 
extended  form,  is  advanced  as  the  only  just  basis  of  taxa- 
tion, and  if  taxes  are  to  be  levied  only  and  exactly  in 
proportion  to  the  benefits  received,  the  foundation  is 
obviously  too  narrow. 

But  the  theory  has  a  particular  application  in  those 
cases  in  which  the  services  rendered  by  the  State  and  the 
benefits  accruing  to  individuals  are  easily  discovered  and 
estimated,  and  it  is  of  special  importance  in  local  finance. 
The  terms  fees  and  prices  are,  however,  better  adapted 
to  the  payments  made  for  special  services  rendered 
by  the  State,  and  the  principles  are  considered  more  prop- 
erly in  connection  with  state  expenditure  and  munici- 
pal trading.  It  is  misleading  to  attempt  to  connect  the 
payment  of  taxes  by  individuals  with  their  supposed  share 
in  the  general  benefits  of  government ;  it  is  better  rather 
to  emphasise  the  distinction  between  "  fees  "  paid  for  par- 
ticular services  and  taxes  levied  for  general  purposes 
(Seligman). 

6.  The  Social  Function  of  Taxation.  —  The  benefit  theory 
of  taxation  is  closely  allied  wdth  another  theory,  according 
to  which  the  kinds  and  amounts  of  revenues  derived  from 
taxation  should  be  adjusted  according  to  their  social  and 
political  effects.  It  is  no  doubt  true  that  in  all  cases  the 
indirect  consequences  of  taxation  are  important,  and  in 
some  cases  the  provision  of  revenue  may  be  considered  as 
of  secondary  importance.  Protective  duties,  for  example, 
so  far  as  purely  protective,  are  non-productive  of  revenue. 


446  ELEMENTS  OF  POLITICAL  ECONOMY 

In  the  same  way,  the  heavy  duties  on  stimulants  are  often 
justified,  not  because  (in  fact)  they  yield  a  large  revenue, 
but  because  (in  theory)  they  check  consumption. 

Another  of  the  social  aims  supposed  to  be  specially 
adapted  for  attainment  by  taxation  is  the  more  equal  dis- 
tribution of  the  national  wealth.  Mill's  peculiar  proposals 
regarding  the  laws  of  bequest  and  inheritance  were  mainly 
justified  by  him  on  this  ground,  and  in  effect  his  proposal 
logically  leads  to  succession  duties,  carried  to  the  extreme 
limits  imposed  by  the  conditions  affecting  accumulation 
and  evasion. 

It  is  not  necessary  to  revert  to  the  general  consideration 
of  the  communistic  ideal.  It  may  suffice  here  to  observe 
that  the  same  end  may  be  promoted  b}^  the  adjustment  of 
expenditure,  and  it  would  seem  better  economy  to  aim 
directly  at  improving  the  condition  of  the  poorer  classes 
than  to  attempt  to  make  the  poor  less  poor,  simply  by 
making  the  rich  less  rich.  Heavy  progressive  duties  which 
lopped  away  all  incomes  above  a  certain  amount  would 
soon  become  unproductive,  whilst  a  wealthy  nation,  by 
general  taxes,  may  provide  for  an  increasing  number  of 
social  needs. 

On  the  general  question  the  summary  of  Professor 
Bastable  seems  temperate  and  well  founded.  "The  re- 
sults of  financial  experience  are  of  some  value  in  respect 
to  the  use  of  taxation  for  other  than  fiscal  purposes.  The 
taxing  power  has  often  been  employed  to  encourage  indus- 
try, to  improve  taste,  to  benefit  health,  or  to  elevate 
morals ;  but  in  none  of  these  applications  has  tlie  desired 
success  been  obtained.  There  is,  therefore,  a  presumption 
against  its  use  in  remedying  the  inequalities  of  wealth. 


THE  CANONS  OF  TAXATION        447 

Its  definite  and  universally  recognised  function  is  the 
supply  of  adequate  funds  for  the  public  services.  To  mix 
up  with  one  very  important  object  another  different,  and 
perhaps  incompatible  one,  is  to  run  the  risk  of  failing  in 
both.  ...  If  the  socialistic  regime  is  the  goal  to  be  aimed 
at,  there  are  more  direct  and  more  effective  modes  open 
than  the  manipulation  of  taxation." 

There  are,  in  brief,  the  multitudinous  methods  of  legal 
enactment  and  of  public  expenditure. 

7.  The  Principle  of  Formal  Justice.  —  Finally,  whatever 
basis  of  taxation  be  adopted,  the  principle  oi  formal  justice 
noticed  in  the  conclusion  of  Adam  Smith's  first  canon 
must  be  considered.  If  it  is  just  —  for  any  of  the  reasons 
usually  assigned  —  to  tax  A,  it  is  just  to  tax  B  under  pre- 
cisely similar  circumstances.  Thus  stated,  the  principle 
seems  purely  abstract  and  as  empty  as  any  other  pure 
form  of  thought.  On  the  analog}^,  however,  of  the  prin- 
ciple of  equality  before  the  law  and  similar  political  prin- 
ciples, it  is  easy  to  give  it  a  material  content.  For 
fiscal  purposes  we  may  substitute  the  term  practically  — 
for  precisely  —  similar.  Thus,  the  possible  extension  of 
a  tax  to  all  similar  cases  (or  conversely,  the  remission) 
may  sufiice  to  destroy  the  prima  facie  reasonableness  of 
extension  (or  remission).  We  shall  see  later  that  the 
same  principle  is  of  vital  importance  in  the  correlative 
department  of  expenditure,  and  as  we  have  already  seen, 
it  is  one  of  the  general  limitations  to  governmental  action. 

8.  Adam  Smith's  Other  Canons  of  Taxation.  —  The  three 
remaining  canons  of  Adam  Smith  give  more  particular 
rules  for  the  attainment  of  equality  and  productivity  in 
the  whole  tax  system  by  reference  to  the  methods  employed 


448  ELEMENTS  OF  POLITICAL  ECONOMY 

in  the  imposition  and  collection  of  particular  taxes.  They 
are,  for  the  most  part,  comparatively  simple  and  require 
but  little  explanation,  although  the  course  of  history  and 
the  present  actual  condition  of  different  nations  show- 
that  they  are  only  carried  into  effect  with  considerable 
difficulty. 

The  second  —  the  canon  of  certainty  —  lays  down  that, 
"  The  time  of  payment,  the  manner  of  payment,  the  quan- 
tity to  be  paid,  ought  to  be  clear  and  plain  to  the  con- 
tributor and  to  every  other  person.''  The  positive  elements 
in  this  maxim  bring  out  the  importance  of  definiteness  and 
publicity.  On  the  negative  side  it  is  aimed  against  the 
arbitrary  exactions  of  the  sovereign  power  and  the  jobbery 
and  abuses  of  its  officials.  Apart  from  the  general  social 
and  political  evils  connected  with  the  exercise  of  arbitrary 
power,  uncertainty  of  taxation  involves  an  economic  waste. 
Ad  valorem  duties  on  imports  are  open  to  the  objection 
that  the  importer  is  never  certain  in  what  grade  his  com- 
modity will  be  classed  for  taxation.  The  method  of 
declaration  which  applies  to  a  large  part  of  the  returns 
to  the  British  income  tax  fails  in  publicity,  and  the  failure 
in  publicity  leads  to  irregularity  and  uncertainty. 

The  tldrd  —  the  canon  of  convenience  —  enjoins  that, 
"  Every  tax  ought  to  be  levied  at  the  time  and  in  the 
manner  in  which  it  is  most  likely  to  be  convenient  for 
the  contributor  to  pay  it."  It  is  justified,  not  only  on 
the  general  grounds  of  good  government,  but  also  on  the 
special  economic  ground  of  the  greater  productiveness  of 
taxes  which  satisfy  this  condition.  It  is  found  possible  to 
raise  a  considerable  revenue  by  taxes  on  commodities,  the 
payments  of  which  are  made  by  the  consumers  in  insensible 


THE   CANOXS   OF   TAXATION  449 

portions,  when  it  would  be  impossible  to  collect  the  same 
amount  by  direct  taxation  at  comparatively  long  intervals. 

The  fourth — the  canon  of  economy — has  for  its  governing 
principle  that,  "  Every  tax  ought  so  to  be  contrived  as  both 
to  take  out  and  to  keep  out  of  the  pockets  of  the  people  as 
little  as  possible  over  and  above  what  it  brings  into  the 
public  treasury  of  the  State."  Taxes  may  break  this  rule 
by  requiring  a  large  number  of  ofhcials  for  their  collection, 
by  involving  restraints  on  trade  and  production,  by  en- 
couraging evasion,  or  by  causing  unnecessary  vexation, 
for  "  though  vexation  is  not  strictly  speaking  expense, 
it  is  certainly  equivalent  to  the  expense  at  which  a  man 
would  be  willing  to  redeem  himself  from  it." 

9.  Other  Rules  of  Taxation.  —  To  these  general  canons 
of  Adam  Smith  the  following  may  be  added,  most  of  which 
are  implied  in  different  passages  of  his  treatment  of  taxa- 
tion, but  have  been  expanded  more  fully  and  emphasised 
by  subsequent  writers,  (a)  A  given  amount  of  revenue 
is  as  a  rule  more  conveniently  raised,  both  from  the  point 
of  view  of  the  government  and  its  subjects,  from  a  small 
number  of  very  productive  taxes  than  from  a  larger  num- 
ber with  smaller  returns  per  unit.  This  was  one  of  the 
principal  reforms  advocated  by  Adam  Smith  with  reference 
to  the  British  customs  duties,  and  was  carried  into  effect 
by  Sir  Robert  Peel  and  his  successors.  The  inextricable 
confusion  of  the  customs  duties  levied  before  these  re- 
forms, and  the  unproductive  character  of  most  of  them, 
can  only  be  realised  by  reference  to  the  details  of  the  his- 
tory of  taxation.  It  is  thought,  however,  by  some  finan- 
ciers of  the  first  rank  that  this  concentration  has  been 
carried  too  far  in  the  United  Kingdom,  and  that  the  bur- 

2g 


460  ELEMENTS   OF   POLITICAL   ECONOMY 

den  of  indirect  taxation  would  be  less  felt  if  spread  over  a 
larger  number  of  commodities.  The  process  of  simplifica- 
tion and  concentration  has  also  been  partially  applied  to 
the  direct  taxes,  imperial  and  local. 

(b)  A  good  system  of  taxation  ought  to  provide  for  a 
self-acting  increase  in  the  revenue  in  proportion  as  wealth 
and  population  and  the  consequent  demands  of  govern- 
mental expenditure  increase.  Thus  a  land  tax  of  a  fixed 
amount  per  acre  is  in  general  much  less  advantageous 
than  a  proportionate  amount  of  rental.  The  income  tax 
and  taxes  on  stimulants  have  the  advantage  of  showing  an 
increasing  return  with  increasing  wealth  and  numbers. 

(c)  Those  taxes  are  best  which  yield  a  steady  calculable 
return.  The  calculations  of  the  estimates  for  the  Budget 
in  the  United  Kingdom  are  now  made  with  extraordinary 
exactness.  The  reason  for  this  rule  is  found  in  the 
advantage  of  adjusting  normal  expenditure  to  normal 
revenue. 

{d)  Those  taxes  are  to  be  preferred  which  in  case  of 
need  can  be  most  conveniently  increased  in  amount  with- 
out involving  new  machinery  or  increased  expenditure  in 
collection,  e.g.  the  income  tax  in  fact,  and  in  theory  the 
tax  on  beer. 

(g)  At  the  same  time,  in  the  progress  of  society  it  may 
be  expedient  to  abandon  old  sources  of  revenue  and  to 
adopt  new  methods  under  the  new  conditions,  notwith- 
standing the  disadvantages  which  ceteris  paribus  attach  to 
all  changes  in  taxation. 

Finally,  it  may  be  observed  that  if,  as  is  almost  inevi- 
table, there  is,  as  regards  any  proposed  tax,  a  conflict  of 
advantages  and  disadvantages  as  tested  by  the  canons  and 


THE  CANONS  OF  TAXATION  451 

rules  of  taxation,  the  less  important  rule  must  be  surren- 
dered, the  importance  being  judged  according  to  circum- 
stances. Adam  Smith,  for  example,  states  emphaticallj'- 
that  the  experience  of  all  nations  shows  that  a  very  con- 
siderable degree  of  inequality  is  not  near  so  great  an  evil 
as  a  small  degree  of  uncertainty.  Again,  productiveness 
covers  a  multitude  of  sins,  and  as  Professor  Bastable  re- 
marks, "  The  successful  administration  of  the  State  is  the 
final  object,  and  therefore  convenience  or  even  equity  may 
have  to  yield  to  productiveness." 

It  is  also  important  to  point  out  explicitly  that  all  the 
rules  must  be  applied  to  a  system  of  taxation  as  a  whole. 
There  are,  of  course,  some  taxes  which  would  be  bad  in 
any  conceivable  system  of  taxation ;  but,  in  most  cases,  a 
criticism  of  a  particular  tax  is  of  little  value  unless  con- 
sideration is  also  given  to  the  other  taxes  with  which  it  is 
combined. 

In  considering  the  effects  of  the  system  of  taxation  and 

of  its  component  parts,  it  is  always  necessary  to  take  into 

account  the  real  incidence.     It  is  of  no  avail  to  set  up  an 

ideal  standard  of  equality,  if  the  actual  methods  adopted, 

though  nominally  and  ostensibly  in  accordance  with  the 

standard,  lead   to   inequality.     No  part  of   the  theory  or 

practice  of  taxation  has  given  rise  to  so  much  controversy 

as  the  real  incidence   of   various   particular   taxes.     The 

"  shifting  "  of  taxes  may  lead  not  only  to  inequalities,  but 

to  injurious  effects  on  the  productive  powers  of  the  society 

as  a  whole. ^ 

1  Abbreviated  from  Principles,  Book  V,  Chaps.  VI- VIII.  See  Bas- 
table, Puhlic  Finance,  3d  ed.,  1903  — the  standard  work  in  English; 
Seligman,  Progressive  Taxation  and  Essays  in  Taxation  ;  Plehn,  Public 
Finance  —  a  most  useful  text-book  ;  Cohn,  Science  of  Finance. 


CHAPTER   IV 

INCIDENCE   OF   TAXATION 

1.  Direct  and  Indirect  Taxes. — One  of  the  oldest  and 
most  important  divisions  of  taxes  is  into  "  direct "  and 
"  indirect."  A  direct  tax  is  defined  by  Mill  —  and  this  is 
the  definition  generally  accepted  —  as  a  tax  demanded  from 
the  very  persons  who  it  is  intended  or  desired  should  pay 
it.  An  indirect  tax  is  demanded  from  one  person  in  the 
expectation  and  intention  that  he  should  be  able  to  transfer 
it  to  another.  Even  as  regards  direct  taxation,  it  may 
well  happen  that,  although  the  person  who  first  pays  the 
tax  is  the  person  who  bears  the  burden  in  the  sense 
intended  by  the  government,  yet  indirectly,  in  ways  not 
contemplated  by  the  government,  part  of  the  original 
burden  and  part  also  of  the  additional  burden  incident- 
ally created  may  be  shifted  to  others. 

Suppose,  for  example,  that  the  State  imposes  a  tax  upon 
houses,  and  that  it  divides  the  amount  payable  in  definite 
proportions  between  the  owner  and  the  occupier,  and  duly 
collects  these  proportions  from  each  separately.  Here  we 
have  apparently  the  simplest  examples  of  direct  taxation 
possible. 

But  an  examination  of  the  incidence  of  tlie  liouse  tax 
shows  that  under  certain  conditions  part  (or  even  the 
wliole)  of  the  nominal  payment  of  the  occupier  may  be 

452 


INCIDENCE  OF   TAXATION  453 

shifted  to  the  owner  —  that  is  to  say,  in  consequence  of 
the  tax  the  occupier  may  pay  so  much  less  rent,  whilst 
under  other  conditions,  part  (or  even  the  whole)  of  the 
nominal  payment  of  the  owner  may  be  shifted  to  the  occu- 
pier by  a  rise  in  rent.  And  apart  from  this  redistribution 
of  the  house  tax  itself  between  owner  and  occupier,  there 
may  be  indirect  effects  upon  agricultural  rents  and  upon 
particular  classes  of  profits. 

Again,  nothing  could  appear  more  direct  and  simple 
than  the  incidence  of  succession  duties ;  the  former  owner  of 
the  property  is  dead,  and  the  State  takes  a  part  to  itself. 

But  if  it  is  known  that  after  death  the  State  will  take  a 
large  share,  a  stimulus  is  at  once  given  to  evasion,  e.g. 
through  the  checks  to  accumulation,  the  encouragement 
of  consumption,  and  gifts  inter  vivos.  It  is  thus  possible 
that  heavy  succession  duties  might  prejudicially  affect  the 
wages  of  labour.  And  there  can  be  no  doubt  that  histori- 
cally, in  countries  that  are  burdened  with  excessive  taxes, 
apart  from  the  share  supposed  to  fall  on  labour,  there  is 
an  additional  burden  due  to  the  contraction  of  enterprise 
and  accumulation. 

If,  however,  in  the  case  of  taxes  nominally  direct,  we 
have  to  penetrate  beyond  the  seen  to  the  unseen,  still  more 
necessary  is  the  study  of  real  incidence  in  the  case  of  taxes 
ostensibly  indirect.  It  may  happen  first  that  the  intention 
of  the  government  that  the  tax  should  be  shifted  from  the 
original  payer  is  not  realised  at  all  or  only  partially ;  sec- 
ondly, it  may  happen  that  the  part  that  is  shifted  is  shifted 
in  a  way  not  contemplated ;  and  thirdly,  there  are  all  the 
after  effects  and  indirect  consequences  as  in  the  case  of 
direct  taxation. 


454  ELEMENTS  OF  POLITICAL  ECONOMY 

It  may  also  happen  that  the  imposition  of  a  tax,  whether 
direct  or  indirect,  will  not  only  impose  a  burden,  intended 
or  not  intended,  but  may  incidentally  create  an  advantage 
and  confer  a  benefit,  sometimes  intended,  sometimes  not. 
Just  as  pauperism  is  attracted  by  high  expenditure,  so 
capitalism  is  attracted  by  low  taxation,  and  thus  heavy 
taxation  in  one  district  gives  an  advantage  to  other  dis- 
tricts lightly  taxed.  Protective  duties  are  intended  to 
protect,  but  other  taxes  may  create  monopolies  not  origi- 
nally intended. 

It  is  clear,  however,  that,  whatever  meaning  or  meanings 
be  given  to  equality  of  taxation,  we  must  always  refer  to 
the  ultimate  real  incidence  with  all  its  burdens,  direct  and 
indirect. 

In  every  problem  of  incidence,  for  the  complete  solu- 
tion, two  questions  must  be  answered:  first,  who  ulti- 
mately pays  the  tax  received  by  the  State  ;  secondly,  who 
bears  the  burdens  or  enjoys  the  advantages  incidentally 
created.  In  the  discussion  of  the  general  principles  we 
are  mainly  concerned  with  the  first  question,  the  inci- 
dental burdens  and  advantages  being  subject  to  variations 
according  to  the  nature  of  the  j)articular  tax. 

2.  The  Incidence  of  Taxation  as  determined  by  Law 
and  Custom.  —  The  general  problem  of  incidence  is  a  prob- 
lem of  distribution,  and  for  the  solution  we  must  refer 
back  to  the  general  principles  already  examined.  And  it 
must  be  observed  that  just  as  distribution  cannot  be  en- 
tirely reduced  to  exchange,  so  neither  can  the  incidence 
of  taxation  be  considered  merely  as  an  application  of  the 
theory  of  value. 

The  power  to  shift  the  payment  of  a  tax  or  to  recoup 


INCIDENCE  OF  TAXATION  455 

the  payment  from  another  source  depends,  in  the  first 
place,  upon  the  influence  of  law  and  custom  in  the  widest 
sense  of  the  terms.  This  influence  may  be  so  great  that 
there  is  no  possibility  of  shifting  the  tax  otherwise  than  as 
directed  by  the  rules  laid  down  by  the  State  or  submitted 
to  under  the  customs  of  the  society,  though  even  in  this 
case  there  are  indirect  consequences,  both  in  the  way  of 
burden  and  of  advantage. 

The  influence  of  law  and  custom  may  be  best  observed 
in  societies  in  which  exchange  is  not  yet  of  fundamental 
importance,  as,  for  example,  in  those  under  the  dominance 
of  feudalism  or  village  communities. 

We  find  in  the  development  of  the  incidence  of  taxation 
an  illustration  of  the  universal  progress  from  status  to 
contract.  At  first,  the  force  of  law  and  custom  directs 
the  transference  of  the  tax  to  its  most  minute  ramifica- 
tions ;  gradually  this  compelling  power  is  limited  to  the 
collection  of  the  tax  from  the  original  payers,  they  in  their 
turn  transferring  the  whole  or  part  of  the  burden,  accord- 
ing to  the  principles  of  contract  and  exchange. 

3.  Incidence  of  Taxation  as  determined  by  Contract  and 
Exchange.  —  In  modern  times  the  State  levies  certain 
taxes,  —  on  persons  directly,  or  indirectly  through  com- 
modities, —  but  the  taxed  persons  may  be  able  to  shift 
the  burden  according  to  various  economic  conditions. 
The  ultimate  incidence  is  no  longer  altogether  deter- 
mined by  the  compulsion  of  law  and  custom,  and  the 
rapacity  of  the  collectors,  but  partly  by  the  voluntary 
actions  of  individuals. 

When  a  tax  is  imposed  on  any  person  (with  no  legal 
power  of  transfer),  he  is  naturally  led  to  reconsider  his 


456  ELEMENTS   OF   POLITICAL  ECONOMY 

whole  economic  position,  so  that  he  may  make  the  burden 
a  minimum  on  the  whole.  The  possibility  of  compulsory 
legal  transference  being  now  excluded,  he  can  only  get 
rid  of  his  burden  (wholly  or  partially)  by  a  change  in  his 
bargains  —  and  it  takes  two  at  least  to  make  a  bargain. 

It  is  quite  clear  that  the  mere  fact  of  the  imposition  of 
a  tax  will  not  in  general  be  sufficient  reason  for  the  origi- 
nal taxpayer  to  ask  and  receive  an  indemnity  from  others. 
If  we  take  the  terms  seller  and  buyer  in  the  widest  sense, 
—  as  applied  to  the  purchase  and  sale  of  land,  labour, 
and  capital,  either  absolutely  or  for  certain  uses,  for  cer- 
tain times,  under  certain  conditions,  —  we  may  suppose 
that  the  State  extracts  from  the  seller  a  certain  part  of 
his  price,  or  imposes  on  the  buyer  an  official  charge  for 
the  privilege  of  being  allowed  to  buy. 

4.  The  Immediate  Effects  on  Price  of  a  Tax.  —  The 
immediate  effect  of  a  tax  on  the  buyer  (the  conditions 
of  supply  remaining  the  same)  will  be  a  fall  in  price  (as 
paid  to  the  seller).  But  the  extent  of  the  fall  is  indeter- 
minate. Before  the  price  has  fallen  to  the  full  amount  of 
the  tax,  the  withdrawal  of  supply  in  response  will  create 
a  new  equilibrium.  If  the  tax  is  imposed  on  the  seller 
(the  demand  remaining  the  same),  the  immediate  effect 
is  to  raise  the  price  paid  by  the  buyer.  But  again  the 
extent  of  the  rise  is  indeterminate,  because  before  the 
price  has  risen  to  the  full  extent  of  the  tax,  the  check  to 
demand  will  produce  a  new  equilibrium.  It  makes  no 
difference  theoretically  whether  the  tax  is  taken  in  the 
first  place  from  the  buyer  or  the  seller;  the  ultimate 
incidence  depends  on  the  shifting,  and  the  shifting  on  the 
elasticity  of  demand  and  supply.     The  general  principle 


INCIDENCE   OF   TAXATION  457 

is  that  the  tax  inflicts  more  loss  on  either  party  the  less 
the  elasticity  of  that  party's  demand  or  supply,  other 
things  (including  the  other  party's  elasticity)  being  the 
same. 

If  the  buyers  are  taxed  in  the  first  place,  they  demand 
so  much  less,  how  much  less  depending  on  the  elasticity 
of  their  demand  ;  and  the  competition  of  sellers  reduces 
the  original  price  —  the  degree  of  the  fall  again  depend- 
ing on  the  elasticity  of  their  supply.  If  the  rise  in  price 
would  decrease  greatly  the  quantity  demanded  (a  very 
elastic  demand),  and  a  similar  fall  in  price  would  have 
very  little  effect  on  the  quantity  offered  (a  very  inelastic 
supply),  the  greater  part  of  the  tax  will  fall  on  the  seller. 

If  the  sellers  are  taxed  in  the  first  place,  they  will  so  far 
offer  less,  and  the  competition  of  unsatisfied  demand  will 
tend  to  raise  the  price ;  and  again  the  new  price  will 
depend  on  the  elasticity  of  demand  and  supply. 

In  general,  however,  except  in  the  extreme  or  limiting 
cases,  the  seller  will  always  receive  something  less  and 
the  buyer  will  pay  something  more  than  the  original 
price,  the  distribution  of  the  burden  being  dependent 
on  the  relative  elasticities.  And  in  general,  also,  the 
effect  of  the  tax  will  be  to  diminish  the  amount  bought 
and  sold. 

In  the  limiting  case  of  perfect  non-elasticity  of  demand, 
if  the  buyer  is  determined  to  have  so  much  quand  meme, 
the  whole  of  the  tax  would  fall  on  the  buyer ;  and  simi- 
larly, if  there  is  perfect  non-elasticity  of  supply,  and  the 
seller  must  sell  quand  meme,  the  whole  of  the  tax  would 
fall  on  the  seller.  If  both  demand  and  supply  are  per- 
fectly non-elastic,  the  distribution  is  indeterminate.      If 


458  ELEMENTS   OF   POLITICAL   ECONOMY 

both  are  perfectly  elastic,  that  is,  if  the  smallest  addi- 
tion to  the  price  will  kill  demand,  or  smallest  subtraction 
kill  supply,  the  tax  kills  the  market,  and  there  is  no 
incidence  because  the  tax  cannot  be  collected. 

5.  Ulterior  Effects  of  Taxation  on  Prices.  —  It  must  be 
borne  in  mind  that  in  the  preceding  section  only  the  imme- 
diate effects  on  markets  prices  have  been  considered. 

The  ulterior  effects  on  prices  will  depend  on  the  various 
conditions  affecting  production  or  supply,  with  the  reaction 
on  demand. 

These  conditions  can  only  be  stated  in  extremely  gen- 
eral terms  if  they  are  to  be  applicable  to  production  (or 
supply)  in  the  widest  sense,  including  the  production  of 
labour  and  of  capital,  and  also  of  the  adaptation  of  land 
and  natural  agents  for  productive  purposes. 

Amongst  such  general  conditions  —  which  have  to  be 
taken  account  of  in  the  determination  of  the  incidence  of 
particular  taxes — are:  (a)  The  influence  of  competition 
and  monopoly  respectively,  which  again  depend  for  their 
efficiency  or  purity  on  a  variety  of  causes,  e.g.  the  mobility 
of  labour  and  capital  and  of  land  (in  the  sense  of  adapta- 
tion to  different  uses  or  transference  to  different  owners), 
and  the  power  of  voluntary  or  state-aided  combination. 
(h)  We  have  to  consider  whether  the  thing  produced  fol- 
lows the  law  of  increasing,  decreasing,  or  constant  return 
—  whether  the  available  supply  is  forthcoming  at  a  uni- 
form cost  or  at  different  costs,  (c)  We  must  take  into 
account  the  method  adopted  in  taxation,  whether  the  tax 
is  ad  valorem  or  specific,  proportionate  or  graduated, 
whether  imposed  directly  on  the  final  product  or  at  prior 
stages,     (d)  We  must  consider  whether  the  tax  is  gen- 


INCIDENCE  OF  TAXATION 


459 


era!  or  particular,  or  equal  or  unequal,  and  how  far  it 
affects  substitutes  or  correlated  articles. 

The  general  nature  of  these  conditions  and  of  the  sub- 
jects covered  by  taxation  shows  that  the  general  principles 
of  the  ultimate  incidence  of  taxation  must  be  considered 
in  reference  to  the  various  classes  of  taxes,  and  it  will  be 
found  that  these  conditions  are  of  varying  importance 
and  operate  in  different  combinations  in  different  cases. 

The  theory  of  the  incidence  of  taxation  involves,  indeed, 
an  application  of  all  the  economic  principles,  theories, 
tendencies,  and  disturbances  already  examined.  ^ 

1  The  more  difficult  parts  of  Principles,  Book  V,  Chap.  X,  are  here 
omitted.  See  Seligman,  Incidence  of  Taxation;  Edge  worth,  "Pure 
Taxation"  in  Economic  Journal. 

Note 

The  effects  of  the  immediate  incidence  of  a  tax  can  be  best  expressed 
by  the  use  of  curves.  The  supply  curve,  SS',  expresses  the  general  law  of 
market  supply,  i.e.  that  in  any  market  the  quantity  offered  tends  to  rise 
-with  every  rise,  and  to  fall  with  every  fall  in  price.  DB'  is  the  demand 
curve. 

Y  D 


460  ELEMENTS  OF  POLITICAL  ECONOMY 

If  the  buyer  pays  the  tax  aE,  Eh  will  be  the  price  received  by  the 
seller;  if  the  seller  pays  the  tax  (receiving  ah  from  the  buyer),  his  net 
receipt  is  still  Eh,  and  at  this  price  Oh  will  be  offered,  and  at  the  price 
ah,  Oh  will  also  be  demanded.  Therefore  Oh  is  the  quantity  demanded 
and  offered  at  the  net  price  to  the  seller  of  Eh,  and  at  the  gross  price  to 
the  buyer  of  ah.  And  the  result  is  the  same  whether  the  buyer  or  the 
seller  pays  the  whole  of  the  tax  in  the  first  place. 

The  price  ah  exceeds  the  price  AH  by  na,  and  the  price  Eh  is  less 
than  the  price  AH  by  En,  and  na  plus  En  equals  the  tax.  It  will  be  seen 
that  if  DD'  becomes  more  elastic,  the  proportionate  rise  in  price  above 
the  original  is  less,  and  in  the  extreme  case  the  whole  tax  falls  on  the  seller. 

Conversely,  demand  remaining  the  same,  and  elasticity  of  supply  in- 
creasing, there  is  a  greater  rise  in  price  to  the  buyer. 

If  the  tax  is  collected  in  any  definite  proportion,  indicated  by  q,  from 
both  buyer  and  seller,  the  result  is  also  the  same.  The  seller  pays  Eq  to 
the  state  and  the  buyer  qa ;  but  the  seller,  as  before,  receives  Eh  net, 
and  the  buyer  pays  ha  gross,  namely,  qa  to  the  state  and  hq  to  the  seller. 
If  the  buyer  sought  to  retain  qE,  at  the  price  ah  minus  qE,  more  would  be 
demanded  than  Oh,  and  at  the  price  Eh  minus  Eq  less  would  be  offered. 

Thus  Oh  is  the  equilibrium  quantity,  hE  the  seller's  net  receipt,  and 
ah  the  buyer's  gross  payment  in  any  case. 

But  the  rise  of  ah  above  AH  and  the  fall  of  Eh  below  AH  will  depend 
on  the  elasticity  of  the  two  curves,  DD'  and  SS'. 

Oh  is  obviously  less  than  OH;  ha  is  greater  than  AH,  and  Eh  less  than 
AH,  except  in  the  limiting  cases  when  DD'  or  *S'*S''  become  horizontal  or 
vertical  straight  lines. 

By  way  of  further  explanation,  it  may  be  added  that  the  88'  curve 
shows  how  much  is  offered  in  response  to  certain  prices ;  if,  by  a  tax,  so 
much  is  extracted  from  each  of  these  prices,  the  whole  supply  curve  is 
raised.  Conversely  of  DD'.  If  the  buyer  must  pay  so  much  more  per 
unit,  the  whole  demand  curve  is  lowered. 

The  effect  of  a  tax  which  is  paid  by  the  buyer  is  equivalent  to  a  fall  in 
demand.  The  desire  to  possess  (relatively  to  other  things),  and  other 
conditions  remaining  the  same,  the  buyer  will  pay  the  same  total  price  as 
before  ;  therefore,  if  part  goes  as  a  tax,  he  offers  so  much  less  to  the  seller 
in  every  case. 

Similarly,  if  the  tax  is  taken  from  the  sellers,  they  will  sell  for  the 
same  set  of  net  prices  as  before  ;  that  is  equivalent  to  a  rise  in  supply.  A 
higher  price  is  needed  to  extract  the  same  supply. 


CHAPTER   V 

TAXES   ON    RENT   AND   LAND 

1.  Taxes  on  Pure  Economic  Rent:  Agricultural  Land. 
—  Economic  rent  (pure)  of  agricultural  land  is  generally 
mingled  in  practice  with  other  forms  of  revenue  due 
to  capital  or  labour,  and  not  merely  to  the  natural  quali- 
ties of  the  soil.  But  for  theoretical  purposes  we  may 
assume  that  the  economic  rent  may  be  isolated  from  these 
other  elements.  In  the  normal  case  the  produce-rent  will 
depend  on  the  excess  above  that  of  the  margin,  and  the 
money  rent  will  depend  on  the  amount  of  produce  and  the 
price  per  unit  which  is  determined  by  the  marginal  cost 
of  production.  Thus  economic  rent  is  a  surplus  which 
depends  upon  natural  conditions  that  may  vary  to  any 
extent,  and  on  price,  which  is  independent  of  rent. 

We  may  further  assume  for  a  first  approximation  that 
there  are  separate  owners  of  the  various  portions  of  land, 
that  the  owners  are  not  in  combination,  and  that  the  lands 
are  let  by  competition  every  year  on  an  accurate  estimate 
of  the  produce-surplus  and  its  price. 

And,  also,  we  may  assume  that  there  is  only  one  kind  of 
produce,  or  that  the  land  can  be  let  only  for  one  purpose. 

In  measuring  the  economic  rent  we  do  not  take  units  of 
land,  but  units  of  productive  power  (labour  and  capital) 
applied   to    different   qualities   of  land.     The  rent  arises 

461 


462  ELEMENTS  OF  POLITICAL  ECONOMY 

from  the  different  return  to  the  same  amount  of  power 
applied  under  different  natural  conditions. 

With  these  various  assumptions  it  is  quite  clear  that  a 
tax  on  economic  rent  cannot  be  shifted  by  landowners. 
It  cannot  be  transferred  to  the  consumer  of  the  produce, 
owing  to  the  competition  of  the  marginal  land  that  pays 
no  rent  and  therefore  no  tax,  nor  to  the  farmer,  since 
competition  leaves  him  only  ordinary  profits. 

The  amount  of  each  particular  rental  depends  upon 
units  of  surplus  produced  (varying  to  any  extent  according 
to  the  superior  natural  conditions),  and  on  the  marginal 
price,  which  is  independent  of  these  superior  conditions. 
And,  accordingly,  a  tax  that  strikes  the  surplus  only, 
remains  where  it  first  falls. 

Even  if  the  tax  is  very  unequal,  and  is  such  that  after 
payment  superior  land  yields  a  lower  net  return  than 
inferior  land,  there  is  no  readjustment  of  the  burden. 

The  same  reasoning  applies  if  we  consider  all  the  land 
to  be  of  the  same  quality,  and  the  surpluses  that  consti- 
tute rent  to  arise  from  the  different  returns  to  successive 
doses  of  capital,  or  if,  as  is  usual,  we  find  the  extensive 
and  intensive  application  of  the  law  of  diminishing  returns 
conjoined. 

Also  in  the  case  of  simple  scarcity-rent  where,  though 
lands  and  costs  are  uniform,  there  is  a  marginal  rent  (or 
differential  profit  over  ordinary  employments  of  capital), 
the  tax  lies  where  it  falls. 

Generally,  under  the  conditions  laid  down,  a  tax  on  eco- 
nomic rent  cannot  be  shifted  by  the  owner  of  the  land ; 
and  if  levied  in  the  first  place  on  the  occupier,  he  can 
retain  it  from  his  rent,  the  mobility  of  capital  acting  as 


TAXES  ON  RENT  AND  LAND         463 

effectively  as  if  he  were  empowered  to  make  the  transfer 
by  the  law  of  the  land. 

2.  Taxes  on  Economic  Rent :  Building  Land.  —  Similar 
reasoning  may  be  applied  mutatis  mutandis  to  the  case  of 
building  land. 

To  begin  with  the  simplest  case :  let  it  be  supposed  that 
the  land  is  only  of  use  for  building,  that  the  same  amount 
of  capital  is  applied  to  each  site,  that  there  is  perfect  mobil- 
ity of  capital,  and  that  the  economic  rent  varies  solely  with 
advantage  of  situation.  Under  these  conditions  it  is  clear 
that  a  tax  on  economic  rent  falls  entirely  on  the  land- 
owners. The  builders  are  immune  because  their  capital 
can  be  applied  to  other  purposes,  and  the  occupiers  escape 
because  the  land  cannot  be  used  otherwise,  and  already  the 
landowners  have  obtained  the  best  results  by  competition. 

The  result  is  the  same  if  we  suppose  that  the  buildings 
are  extended  in  height  until  the  marginal  storey  is  reached. 

To  vaiy  the  conditions,  assume  next,  that  some  of  the 
land,  e.g.  the  suburban  land,  can  be  used  for  agriculture. 
The  agricultural  rental  will  depend  on  the  conditions 
affecting  agriculture  generally,  and  the  peculiarities  of  the 
land ;  so  that  we  may  say  that  the  agricultural  rent  is 
independent  of  the  urban  conditions.  If,  then,  a  tax  is 
imposed  on  building,  but  not  on  agricultural,  rental,  the 
tax  on  ground  rent  on  the  margin  will  obviously  fall  on 
the  occupier.  Land  will  not  be  devoted  to  building  unless 
it  gives  at  least  the  agricultural  rent  plus  the  tax. 

A  house-rent  tax  is  imposed  on  the  building  rent  and 
ground  rent  conjoined.  If  the  building  rent  is  regarded 
as  determined  by  the  ordinary  rate  of  profit,  and  the  oc- 
cupier's demand  is  inelastic,  a  tax  on  the  total  house  rent 


4G4  ELEMENTS  OF   POLITICAL   ECONOMY 

levied  from  the  occupier  must  fall  iu  the  first  place  on  the 
occupier.  But  on  the  same  assumptions  he  cannot  transfer 
any  part  to  the  landowner.  If,  however,  the  demand  is 
elastic,  and  as  before  the  building  rent  constant,  part  of  the 
tax  will  be  thrown  on  the  landlord ;  but  the  amount  will 
depend  on  the  elasticity  of  demand.  And  the  transference 
can  only  take  place,  of  course,  on  the  assumption  that  the 
contracts  for  the  hire  of  the  land  are  subject  to  constant 
renewals  on  any  change  of  circumstances. 

It  follows,  then,  that  in  general  a  tax  on  ground  rents,  if 
intended  to  strike  the  landlord,  should  be  levied  directly, 
and  not  left  to  be  shifted  by  the  occupier  on  the  renewal 
of  his  lease.  And  the  longer  the  lease,  still  more  necessary 
is  it  to  levy  the  two  portions  independently. 

There  is,  however,  always  the  practical  difficulty  of  de- 
termining how  much  of  the  total  house  rent  is  to  be 
ascribed  to  the  ground,  and  how  much  to  the  building, 
when  we  are  considering  buildings  erected  under  different 
conditions.  There  is,  besides,  in  business  premises,  the 
value  of  the  good-will,  and  in  ordinary  residences  the 
value  of  the  tenant  right  as  shown  by  the  general  condi- 
tion and  amenity. 

Still  the  fact  remains  that  during  the  lease  any  new  tax 
levied  from  the  occupier  cannot  be  shifted,  and  on  the  expiry 
of  the  lease  may  not  be  shifted  in  the  proportion  intended. 

Any  tax  intended  to  strike  "  land  values,"  which  really 
strikes  the  occupiers  of  houses,  has  important  ulterior 
effects.  As  regards  dwelling-houses,  it  may  lead  to  over- 
crowding and  may  check  improvements,  and  as  regards 
businesses,  it  may  check  their  development  or  in  some 
cases  may  fall  on  the  consumers  of  the  articles  supplied. 


TAXES   OX   RENT   AXD   LAND  465 

Oil  the  other  hand,  a  special  tax  on  land  suitable  for 
building  which  is  being  held  up  for  the  rise  in  value,  and 
in  the  meantime  is  only  rated  at  its  agricultural  or  un- 
built value,  would  tend  to  throw  the  land  sooner  into  the 
hands  of  the  builders,  and  so  far  in  the  meantime  general 
house  rents  would  fall.  But  the  ulterior  effects  might  be 
that  lands  would  be  used  for  inferior  buildings  which  it 
would  be  expensive  to  remove  later  on,  so  that  ultimately 
the  lands  would  not  be  so  well  occupied  and  would  yield 
lower  rents  and  also  lower  taxes,  and  besides  would  have 
buildings  not  so  well  adapted  for  the  use  of  the  tenants. 

3.  Taxation  of  Land  Values  :  Practical  Conclusions.  — 
The  preceding  sections  indicate  the  principal  theoretical 
difficulties  in  connection  with  the  incidence  of  taxes  on 
land,  and  by  varying  the  hypotheses,  and  by  making  dif- 
ferent combinations,  many  different  cases  might  be  pre- 
sented. Enough,  however,  has  been  brought  forward  to 
justify  some  important  practical  conclusions  regarding 
the  proposal  to  tax  "land  values." 

(a)  Any  tax  intended  to  strike  pure  economic  rent 
should  be  taken  directly  from  the  owners  of  that  rent. 
The  shifting  by  the  occupier  is  uncertain,  and  the  uncer- 
tainty causes  inequality.  The  partial  evasion  by  the  oc- 
cupier (i.e.  legitimate  evasion),  as  by  taking  inferior 
accommodation,  or  by  charging  higher  rates  to  the  custom- 
ers of  his  business,  is  productive  of  economic  loss  that  may 
far  more  than  neutralise  any  gain  of  revenue  to  the  State 
or  the  municipality. 

(h}  It  follows  also  that  if  these  inconveniences  are  not 
to  ensue,  the  amount  of  the  true  economic  rent  must 
be  accurately  determined,  and   the   ownership   definitely 


466  ELEMENTS  OF  POLITICAL  ECONOMY 

traced.  Both  of  these  problems  present  great  practical 
difficulties.  True  economic  rent  is  in  practice  nearly 
always  combined  with  other  forms  of  revenue.  The  rent 
that  is  paid  for  agricultural  land  is  partly,  and  very  often 
largely,  simply  interest  on  the  various  forms  of  capital 
sunk  in  and  about  the  land.  This  interest  is,  in  general, 
calculated  at  a  low  rate.  Any  exceptional  taxation  on 
"  economic  rent "  that  actually  struck  profit-rent,  would 
check  agricultural  improvement,  and  lead  to  the  deteriora- 
tions of  land  already  improved  (Adam  Smith). 

Again,  as  regards  the  ground  rents  of  urban  lands,  al- 
though the  pure  economic  rent  seems,  at  first  sight,  more 
easily  ascertained,  it  is,  as  a  matter  of  fact,  very  difficult 
to  determine  accurately,  and  there  must  be  a  considerable 
margin  of  doubt.  If  houses  were  tents  or  tabernacles 
that  could  be  easily  shifted,  and  required  no  connections 
with  systems  of  roads,  water,  lighting,  drainage,  etc.,  the 
economic  rent  of  a  "  stance "  would  be  simple  enough. 
But  the  more  complicated  the  building  and  its  connec- 
tions, and  the  more  it  is  adapted  for  special  purposes, 
so  much  the  more  difficult  is  it  to  separate  the  pure  eco- 
nomic rent  of  the  ground  from  other  elements  included 
in  the  gross  rental. 

Further,  even  when  the  amount  of  the  pure  economic 
rent  has  been  determined,  there  is  still  the  difficulty  of 
discovering  the  true  owner,  that  is  to  say,  for  the  purposes 
of  this  exceptional  taxation.  The  "  true  "  owner  from  the 
point  of  view  of  those  who  advocate  this  particular  penalty 
is  in  the  position  of  the  "  original  thief  "  of  stolen  goods. 
Just  as  a  purchaser  in  market  overt  is  not  held  to  be  lia- 
ble to  restore  the  goods,  so  neither  should  the  person  who 


TAXES  ON  RENT  AND  LAND         467 

has  paid  the  full  value  for  land  to  the  original  thief  be 
liable  to  restore  the  land  (or  its  value)  to  the  original 
owner  —  the  community.  But  in  old  countries  the  origi- 
nal thief  has  long  ago  been  lost  sight  of  —  he  cannot  be 
tracked  through  the  maze  of  contracts. 

It  is  said,  however,  that  apart  from  this  original  sup- 
pression of  free  land,  there  is  a  continuous  exploitation 
by  private  owners  of  the  increasing  revenues  really  due 
to  the  growth  of  the  State,  or  more  precisely  to  the  envi- 
ronment of  the  land.  This  is,  no  doubt,  perfectly  true 
in  progressive  societies  under  certain  conditions  —  though 
not  necessarily  and  universally  true  as  is  shown  by  the 
great  fall  in  the  rental  of  some  agricultural  lands  in  Eng- 
land in  recent  years,  and  in  the  decaying  parts  of  some 
towns  and  cities.  But  supposing  that  this  unearned  — 
this  continually  "becoming"  increment — could  be  sepa- 
rated, it  would  still  be  difficult  to  tax  the  true  owner  or 
the  actual  exploiter.  If  the  exceptional  tax  were  im- 
posed on  the  sales  of  lands,  it  would  check  the  transfer  of 
lands,  and  a  corresponding  tax  carried  over  to  the  lands 
not  sold  would  be  difficult  to  estimate  accurately.  If  the 
tax  were  imposed  on  new  leases,  it  would  give  a  relative 
advantage  to  the  old  lessees;  and  if  they  were  taxed 
accordingly,  there  is  again  the  difficulty  of  estimation. 

((?)  The  proposal  to  tax  land  values  —  in  the  sense  of 
"  unearned  increments  "  —  is  simple  only  in  appearance. 
It  is  not  only  difficult  to  distinguish  in  rentals  between 
unearned  and  earned,  and  between  the  respective  owners 
of  these  portions,  but  it  is  difficult  to  know  when  the  ap- 
plication of  the  principle  is  to  stop,  and  the  fear  of  creat- 
ing precedents  is  one  of   the  greatest  and  most  salutary 


468  ELEMENTS   OF   POLITICAL   ECONOMY 

checks  on  governmental  interference.  It  lias  already 
been  explained  that  there  are  large  unearned  elements  in 
every  species  of  revenue.  But  there  can  be  no  question 
that  any  attempt  to  seize  them  as  they  arise  would  cramp 
the  general  activity  of  the  society,  and  to  seize  them  after 
they  have  been  suffered  to  accumulate  would  be  an  ex  post 
facto  policy  which  would  quite  as  effectively  encourage  the 
others  not  to  make  any  such  gains. 

It  is,  of  course,  assumed  in  this  argument  that  the  seiz- 
ure is  complete  and  differential,  for  such  additions  to  prop- 
erty and  income  are  of  course  subject  to  general  taxation 
of  an  ordinary  kind.  There  can  be  no  question  that  the 
attempt  generally  to  differentiate  between  earned  and  un- 
earned income  would  logically  end  in  socialism,  and  would 
destroy  the  efficiency  of  the  present  system. 

(c^)  And  thus  we  again  reach  the  position  that,  if  the 
ultimate  aim  is  socialism  or  any  approximation  thereto,  it 
is  better  to  try  to  attain  the  end,  not  indirectly  by  excep- 
tional taxation,  but  directly  by  more  general  methods. 
And  still  more  is  this  the  case  if  the  reforms  contemplated 
are  not  so  subversive  of  the  present  system  as  to  be  fairly 
called  socialistic.  There  are  many  positive  abuses  con- 
nected with  the  private  ownership  of  land,  and  there  are 
many  defects  resulting  from  a  want  of  land  for  public  pur- 
poses. But  these  abuses  and  defects  cannot  be  counterbal- 
anced or  obviated  merely  by  the  absorption  of  unearned 
increments. 

By  the  theory  of  English  law  it  is  said  that  the  owner 
of  the  L'uid  can  prosecute  for  trespass  those  who  sail  above 
it  in  a  balloon,  although  hap})ily  his  remedy  would  consist 
only  in  the  damages  proved  to  result.     But  very  few  people 


TAXES   ON   RENT   AND   LAND  469 

know  anything  of  the  hiw  of  trespass,  and  the  threat  of  the 
utmost  rigour  of  the  law  placarded  on  multitudes  of  notice- 
boards  throughout  this  country  is  a  ridiculous  exploitation 
of  the  law-abiding  habits  of  the  community. 

The  provision  of  open  spaces  in  crowded  neighbourhoods 
is  now  considered  so  important  that  great  expense  is  in- 
curred in  widening  streets  and  making  gardens  in  the  older 
parts  of  towns  and  cities ;  and  yet  we  find  that  such  cities 
and  towns  are  continually  extended  into  purely  agricul- 
tural land  without  any  adequate  reservation  of  space  for 
light  and  air  in  the  dwellings,  convenience  of  communica- 
tion, or  facilities  of  recreation.  Instead  of  attempting  to 
obtain  the  unearned  increment  from  new,  crowded  dwell- 
ings, it  would  be  far  better  from  every  social  standpoint 
to  extend  the  area  of  building,  not  by  taxing  vacant  build- 
ing lands,  but  by  compelling  all  new  building  land  to  con- 
tribute a  share  toward  providing  for  the  perpetual  vacancy 
of  sufficient  land  for  public  purposes.  As  it  is,  a  town  is 
extended  as  if  the  inhabitants  intended  to  fortify  it  with  a 
wall  able  to  resist  modern  artillery,  and  as  if  the  means 
of  communication  Avere  restricted  to  muddy  mediicval 
roads. 

That  a  part  of  newly  occupied  land  should  be  reserved 
for  public  purposes  is  a  custom  of  the  highest  antiquity. 
Mr.  Seebohm,  in  his  classical  work  on  the  Englisli  village 
community,  was  unable  to  account  for  the  origin  of  little 
odds  and  ends  of  unused  land  which  have  from  time  im- 
memorial been  called  "  no  man's  land,"  or  "  any  one's  land," 
or  "Jack's  land."      ]\[r.  Gomme,^  however,  has  suggested 

1  The  facts  cited  are  taken  from  Mr.  Gomme's  Village  Community, 
pp.  114,  115. 


470  ELEMENTS   OF   POLITICAL   ECONOMY 

that  an  explanation  may  be  found  in  a  Scottish  custom.^ 
Clootie's  croft  or  the  gudeman's  field  consisted  of  a  small 
portion  of  the  best  laud,  set  apart  by  the  inhabitants  of 
most  Scottish  villages  as  a  propitiatory  gift  to  the  devil,  on 
which  property  they  never  ventured  to  intrude.  It  was 
dedicated  to  the  devil's  service  alone,  being  left  untilled 
and  uncropped,  and  it  was  reckoned  highly  dangerous  to 
break  up  by  tillage  such  pieces  of  ground. ^ 

1  Quoted  from  Henderson's  Folklore  of  Xorthern  Counties,  p.  278. 

2  Of.  Book  V,  Chap.  XI,  of  Principles,  and  The  Final  Report  of  the 
Boyal  Comniissio7i  on  Local  Taxation. 


CHAPTER  VI 

TAXES   ON   CONSUMABLE  COMMODITIES 

1.  Methods  of  Taxing  Commodities.  —  Under  modern 
conditions,  taxes  on  consumable  commodities  are  levied  in 
three  ways :  (a)  directly  on  the  consumer,  e.g.  licenses  to 
use  certain  things  ;  (J)  indirectly  through  the  inland  pro- 
ducer, e.g.  excise  duties  ;  (c)  indirectly  through  the  ex- 
porter or  the  importer  —  customs  duties.  The  term 
consumable  commodities  must  be  taken  in  a  large  sense, 
e.g.  qua  the  dog  tax,  the  owner  is  the  consumer  of 
the  commodity  dog,  and  by  analogy  the  employer  is  the 
consumer  of  his  liveried  servants  (and  not  the  converse). 

(a)  Of  taxes  that  are  imposed  primarily  on  the  con- 
sumer the  most  important  in  modern  times  is  the  house 
tax,  if  the  occupier  is  regarded  as  the  consumer  of  that 
commodity. 

Other  direct  taxes  on  consumption  may  be  described  as 
licenses  on  use.     Such  licenses  are  of  very  ancient  origin. 

Under  present  conditions  direct  taxation  of  the  con- 
sumer is  not  considered  a  convenient  source  of  revenue 
except  to  some  extent  for  local  purposes.  The  great 
objection  to  such  taxes  is  that  they  are  inconvenient  to 
the  taxpayer,  and  unproductive  to  the  revenue.  In  the 
United  Kingdom  the  annual  average  (on  carriages,  dogs, 
guns,  etc.)  from  this  source  is  now  only  X  1,360,000. 

471 


472  ELEMENTS   OF   POLITICAL   ECONOMY 

Some  of  these  licenses,  however,  are  retained  partly  for 
police  purposes. 

(J)  The  present  excise  duties  —  levied  on  the  inland 
producer — may  be  connected  historically  with  direct  con- 
sumption taxes.  In  England,  for  a  long  period,  the 
monarch  lived  of  his  own,  but  he  also  took  directly  much 
consumable  wealth  in  the  course  of  his  journeys  through 
the  country.  The  royal  court  travelled  like  a  host  of 
locusts.  The  next  step  in  advance  was  the  development 
of  the  right  of  purveyance  or  preemption.  The  king  paid 
for  his  commodities,  but  he  did  so  at  prices  fixed  by  his 
own  officers  and  wdth  tallies  that  were  not  always  hon- 
oured on  presentation.  In  the  literal  signification  these 
exactions  were  excises. 

Excise  duties  may  also  be  traced  to  another  source. 
The  king  possessed  large  feudal  rights  in  the  shape  of 
market  dues  and  tolls,  and  the  transition  from  exactions 
of  this  kind  to  taxes  on  sales  was  natural  and  in  most 
countries  was  accomplished  very  early. 

The  crown  also  enjoyed  certain  prerogatives  for  the 
regulation  of  trade.  Many  fines  were  imposed  and  licenses 
granted  in  matters  affecting  trade  and  merchandise. 
From  regulation  to  taxation  the  transition  also  seemed 
easy  and  natural  until  the  revolt  of  the  American  colonies 
shattered  the  survivals  of  this  mediceval  prerogative. 

(c)  The  customs  duties  —  levied  on  exports  to  and  on  im- 
ports from  foreign  countries  —  are  of  very  ancient  origin. 
The  term  customs,  or  its  Latin  equivalent  consuetu- 
dines,  was  at  first  applied  to  all  kinds  of  customary 
payments,  including  inter  alia  various  kinds  of  ecclesias- 
tical dues.     Customs  duties  in  the  modern  sense  may  be 


TAXES   ON   CONSUMABLE   COMMODITIES  473 

traced  like  excise  duties  to  different  sources.  Tolls  were 
levied  by  the  king  at  the  ports  ;  and  licenses  were  granted 
conferring  exemptions  and  privileges. 

The  history  of  the  British  customs  and  excise  duties 
in  the  nineteenth  century,  when  they  had  become  a  fear- 
fully tangled  growth,  is  the  best  possible  commentary  on 
the  principles  of  taxation  laid  down  by  Adam  Smith  and 
developed  by  his  successors.  There  is  not  one  of  the 
great  canons  which  we  are  accustomed  to  take  for  granted 
which  was  not  transgressed  in  every  conceivable  applica- 
tion before  the  conclusion  of  the  great  French  war  (1815). 

A  parliamentary  report  of  1829  showed  that  £6,000,000 
was  raised  by  taxes  on  the  raw  materials  of  manufacture, 
—  the  worst  of  all  methods,  because  advanced  by  the  pro- 
ducer at  the  first  stage,  —  whilst,  2^^'''  contra,  protective 
duties  were  levied  on  every  manufacture  whatever  —  on 
those  not  specially  enumerated  20  per  cent,  and  in  some 
cases  75  per  cent.  Agriculture  was  protected  still  more  — • 
there  were  not  only  corn  laws  but  animal  laws  (the  duty  on 
an  ass  being  10s.  and  on  a  horse  £1),  whilst  the  importation 
of  animals  used  as  food  was  absolutely  prohibited.  By  the 
customs  tariff  of  1842,  262  articles  of  raw  materials  of 
manufacture  yielded  about  £2,000,000,  and  200  finished 
manufactures  yielded  less  than  £500,000  ;  and  taking  a 
general  view  we  find  that  there  M'ere  704  articles  which 
altogether  yielded  a  little  over  £1,000,000. 

The  excise  duties  give  corresponding  results:  many 
were  unproductive  and  many  were  prolific  in  evil  results 
{e.g.  taxes  on  bricks,  glass,  paper,  soap). 

The  period  of  reform  began  practically  in  1842  under 
Sir  Robert  Peel.     In  that  year  he  reimposed  the  income 


474  ELEMENTS  OF  POLITICAL  ECONOMY 

tax,  whicli  enabled  him  to  abolish  or  reduce  many  of  the 
most  injurious  customs  duties,  e.g.  duties  on  raw  material. 
In  1845  the  income  tax  was  renewed  for  three  years  to 
effect  further  reforms,  and  430  articles  were  taken  off  the 
tariff  and  other  reductions  were  made.  In  1846  the  Corn 
Laws  were  repealed,  and  animal  food  (alive  or  dead)  was 
admitted  free,  and  many  other  customs  duties  (as  also  the 
excise  on  glass)  were  abolished.  The  same  policy  was 
continued  under  Lord  John  Russell,  the  Navigation  Act 
being  repealed  in  1850.  In  1853  Mr.  Gladstone  became 
Chancellor  of  the  Exchequer,  and  123  articles  were  set  free 
from  customs  and  133  reduced.  The  Crimean  War 
checked  the  progress  of  reform,  but  the  final  result  was  the 
reduction  of  the  tariff  to  such  a  degree  of  simplicity  that 
practically  only  four  articles  —  spirits,  tea,  tobacco,  wine  — 
were  retained  for  revenue,  the  rest  of  the  tariff  being 
either  to  support  excise  duties  or  to  prevent  substitution. 
2.  The  Incidence  of  Taxes  on  Commodities.  —  The  inci- 
dence of  taxes  on  commodities  furnishes  a  good  illustration 
of  the  general  principles  already  examined.^  If  the  tax  is 
imposed  directly  on  the  consumer,  it  so  far  tends  to  check 
his  demand.  This  check  to  demand  so  far  will  cause  a 
contraction  of  supply  when  equilibrium  is  restored.  The 
extent  of  the  contraction  will  depend  partly  on  the 
elasticity  of  demand,^  which  again  depends  on  various 
factors  (e.g.  the  possibility  of  substitution)  and  partly  on 
the  conditions  of  suppl3^  The  ultimate  effect  on  price 
will  vary  according  as  the  commodity  follows  the  law  of 
increasing,  diminishing,  or  constant  return,  and  according 

1  See  above,  Book  V,  Chap.  IV. 

2  Ibid.  Book  III,  Chap.  II,  Sec.  1. 


TAXES  ON  COXSUMABLE  COMMODITIES         475 

as  it  is  produced  under  free  competition  or  under  a  com- 
plete or  partial  monopoly. 

If  the  tax  is  imposed  in  the  first  place  on  the  producer 
or  the  dealer,  he  will  endeavour  to  shift  it  to  the  consumer, 
and  whether  he  can  do  so  or  not  depends  upon  similar  con- 
ditions. In  fact,  theoretically,  it  is  a  matter  of  indifference 
from  whom  the  tax  is  collected  in  the  first  place,  and 
practically  the  method  of  collection  is  generally  only  of 
importance  as  regards  the  real  burden  on  the  first  impo- 
sition of  the  tax. 

In  general,  the  price  will  rise  to  the  consumer  more  than 
in  proportion  to  the  tax,  because  the  supervision  necessary 
for  the  tax  will  prevent  various  economies  and  improve- 
ments ;  the  rise  in  price  will  check  demand  and  contract 
supply,  and  there  will  thus  be  a  further  check  to  econo- 
mies and  improvements ;  a  large  capital  may  be  required 
to  advance  the  tax,  and  this  advantage  to  large  capitals 
restricts  competition  and  increases  the  power  of  monopoly 
and  combination.  The  truth  in  these  positions  is  abun- 
dantly illustrated  in  the  history  of  British  finance. 

At  the  same  time,  however,  the  exceptions  are  of  interest 
theoretically.  If  the  commodity  follows  the  law  of  dimin- 
ishing return,  the  tax  will  cause  a  recession  of  the  margin, 
and  the  marginal  cost  being  less  apart  from  the  tax  the 
price  will  so  far  rise  less  than  by  the  amount  of  the  tax. 
If,  however,  the  commodity  follows  the  law  of  increasing 
return,  the  price  will  rise  through  the  contraction  of  supply 
more  than  in  proportion  to  the  tax.  If  there  is  a  monopoly, 
in  general  the  price  will  not  rise  to  the  full  extent  of  the 
tax,  and  in  certain  cases  it  may  not  rise  at  all,  the  whole 
tax  falling  on  the  monopolist. 


476  ELEMENTS   OF   POLITICAL   ECONOMY 

It  is  to  be  observed  that  the  producer  may,  in 
certain  cases,  be  able  to  shift  part  of  the  tax  to  wages, 
as  the  contraction  of  supply  will  lower  the  demand  for 
labour. 

Ultimatel}^  however,  the  relative  net  advantages  of  the 
kinds  of  labour  involved  must  be  restored,  although  if 
there  has  been  a  monopoly  element  in  the  wages  the  loss 
will  not  be  recovered. 

In  all  cases  of  internal  taxation  it  is,  of  course,  assumed 
that  corresponding  customs  duties  are  levied  on  similar 
commodities  and  possible  substitutes. 

The  determination  of  the  incidence  of  import  duties  de- 
pends on  the  theory  of  foreign  trade,  and,  in  my  opinion,  is 
best  worked  out  in  terms  of  prices.  Suppose  that  a  heavy 
import  duty  is  suddenly  imposed,  the  foreign  producer  will 
not  send  the  product  to  the  taxing  country,  if  other  free 
markets  are  open,  unless  the  importer  pays  the  tax.  The 
payment  of  the  tax  will,  however,  check  the  demand,  and 
there  will  be  a  consequent  reaction  on  production.  If  the 
taxing  country  has  been  taking  a  large  part  of  the  foreign 
supply  (a  partial  buyers'  monopoly),  the  foreigner  may  be 
compelled  to  bear  part  of  the  tax  to  lessen  his  loss ;  and  if 
the  commodity  is  more  or  less  of  a  producers'  monopoly,  or 
is  produced  according  to  diminishing  return,  the  price  to 
the  taxing  country  will  never  rise  to  the  full  extent  of 
the  tax.  If,  on  the  other  hand,  the  demand  of  the  tax- 
ing country  is  relatively  small,  if  supply  can  be  readily 
adjusted,  and  if  other  free  markets  are  predominant,  the 
whole  of  the  tax  Avill  fall  on  the  consumer,  and  the  price 
may  rise  more  than  by  the  amount  of  the  tax,  owing  to 
the  indirect  influences  already  noticed.     Most  commonly 


TAXES   OX   CONSUMABLE   COMMODITIES  477 

the  tax  falls  (with  the  surcharges)  on  the  consumer,  and 
it  seldom  happens  that  the  conditions  arc  such  that  it 
will  strike  the  particular  foreign  producer  seriously.  He 
will  seek  other  employment  for  his  capital  or  other  mar- 
kets for  his  produce.  It  must  be  remembered  also  that 
the  case  of  a  monopoly  is  much  more  rare  than  may  ap- 
pear at  first  sight.  It  does  not  follow  that,  because  one 
country  only  produces  a  certain  commodity,  it  is  therefore 
sold  at  a  monopoly  price.  In  order  that  this  may  be  done, 
there  must  be  perfect  combination  amongst  all  the  pro- 
ducers, as  appears  to  be  the  ideal  of  modern  trusts.  But 
under  modern  conditions  there  are  very  few  important 
commodities,  if  any  (having  regard  to  effective  substi- 
tutes), which  are  confined  to  any  one  country,  and  a  com- 
bination between  producers  of  different  countries  is  still 
more  difficult  to  obtain. 

The  case  of  diminishing  return  is  also  practically  of  still 
less  importance.  If,  for  example,  Britain  imposed  a  tax 
on  wheat,  it  is  doubtful  if  any  part  of  it  would  fall  on  the 
foreign  producer. 

When  equilibrium  is  restored  after  the  imposition  of 
the  tax,  it  is  plain  that  the  price  in  the  taxing  country 
will  differ  from  the  price  in  the  producing  country  by  the 
amount  of  the  tax  (and  its  charges)  and  the  cost  of  car- 
riage. In  general,  the  price  will  be  determined  by  the 
conditions  of  supply  and  demand  in  the  country  of  ori- 
gin, and  the  taxing  country  as  a  rule  has  only  a  minor 
influence,  relatively  to  the  whole  commercial  world, 
upon  the  demand. 

The  ulterior  effects  consequent  on  the  disturbance  of 
international  trade  and  the   necessary  readjustments  will 


478  ELEMENTS  OF  POLITICAL  ECONOMY 

also,  in  general,  be  unfavourable  to  the  country  imposing 
the  tax.  The  diminution  of  imports  will  check  exports 
either  directly  or  indirectly,  since  imports  are  paid  for  by 
exports.  It  is  true  that  the  productive  power  formerly 
employed  in  making  these  exports  may  be  used  to  make 
commodities  for  the  home  market,  and  at  the  same  time 
also  the  taxation  of  the  foreign  products  may  lead  to  an 
increased  demand  for  the  products  of  home  labour.  This, 
indeed,  is  the  foundation  of  one  part  of  the  theory  of  pro- 
tection. And  it  is  clear  that  if  before  the  duty  the  pro- 
ductive power  of  the  country  had  been  most  advantageously 
distributed,  the  redistribution  consequent  on  the  duty 
must  involve  some  loss.  In  brief,  any  import  duty  so  far 
restricts  the  aggregate  of  foreign  trade,  and  in  general 
such  a  contraction  is  disadvantageous,  although  there  are 
exceptions. 

An  import  duty  to  be  effective  for  revenue  purposes 
must  be  supported  by  corresponding  excise  duties  on  the 
commodity  and  its  substitutes.  Similarly  the  commodity 
must  be  taxed,  whatever  its  use.  Thus  it  is  said  that  the 
new  import  duty  on  sugar  will  also  fall  on  blacking  into 
which  molasses  enters,  and  to  some  extent  also  it  will 
fall  on  beer  and  ham. 

The  imposition  of  an  export  duty  on  coal  by  the  British 
government  in  1901  has  given  a  special  interest  to  the 
general  theory  of  such  duties.  The  popular  idea  is  that 
because  a  tax  on  an  import  falls  on  the  home  consumer, 
therefore  a  tax  on  an  export  will  fall  on  the  foreign  con- 
sumer. But  this  argument  omits  two  essential  considera- 
tions. The  export  duty  is  not  and  cannot  be  supported 
by  corresponding  excise  duties  in  the  foreign  country,  and, 


TAXES  ON  CONSUMABLE  COMMODITIES         479 

secondly,  the  foreign  country,  instead  of  being  a  limited 
area,  consists  of  the  whole  commercial  world. 

If  export  duties  fell  wholly  or  mainly  on  the  foreign 
country,  it  would  surely  be  to  the  economic  interest  of  all 
nations  to  adopt  export  duties,  but  in  modern  states  they 
are  insignificant  compared  with  import  duties. 

The  complete  abolition  of  duties  on  exports  would 
hardly  affect  the  finances  of  the  European  states,  whilst 
anything  that  disturbed  the  revenue  from  imports  would 
be  the  cause  of  grave  concern  to  nearly  all  nations. 

The  mercantilists  imposed  specially  heavy  duties  on 
certain  exports,  e.g.  on  the  raw  materials  of  manufacture 
and  on  the  instruments  of  production.  These  duties,  how- 
ever, were  intended  to  check  exportation  rather  than  to 
yield  revenue  ;  and  in  the  extreme  case,  which  was  very 
common,  they  were  intentionally  prohibitive.  The  idea 
was  to  preserve  peculiar  national  advantages  for  the  home 
producer,  and  in  some  cases  to  cheapen  important  com- 
modities to  the  home  consumer.  The  case  of  revenue 
export  duties  is  quite  different.  As  regards  the  incidence 
on  the  first  imposition,  the  trader  will  ask  the  foreign 
consignee  to  pay  the  duty,  but  whether  the  foreigner  will 
consent  to  do  so,  in  whole  or  in  part,  depends  on  the  possi- 
bility of  his  obtaining  substitutes  and  on  the  intensity  of 
his  demand.  With  the  extension  and  development  of 
commerce  and  the  advance  of  the  practical  sciences  bearing 
on  industry,  the  possibility  of  finding  substitutes  is  vastly 
increased  and  the  intensity  of  demand  is  proportionately 
lessened.  If,  however,  the  foreigner  can  obtain  his  sup- 
ply from  other  sources,  plainly  he  will  not  pay  the  tax. 
Accordingly  the  producers  of   the  export  (including  the 


480  ELEMENTS  OF  POLITICAL   ECONOMY 

whole  series  engaged  in  completing  the  act  of  production 
by  delivery  into  the  hands  of  the  foreign  consumer)  must 
pay  the  tax,  or  the  trade  must  cease  or  be  greatly  dimin- 
ished. 

If  the  taxed  commodity  comes  under  the  rare  category 
of  national  monopoly,  it  is  possible  that  the  whole  of  the 
tax  may  fall  on  the  foreign  consumer.  The  term  mo- 
nopoly, as  in  the  case  of  import  duties,  again  requires 
a  careful  interpretation.  Even  supposing  that  only  one 
country,  (say)  England,  produces  a  particular  commodity, 
(say)  smokeless  coal,  that  is  a  "necessary"  to  other 
nations,  it  will  not  command  a  monopoly  price  unless  all 
the  producers  make"  an  effective  combination. ^ 

And,  moreover,  if  there  were  such  an  effective  combi- 
nation which  had  secured  a  monopoly  price,  the  export 
duty  would  fall  wholly,  or  to  a  great  extent,  on  the  mo- 
nopolists. If  the  trade  would  bear  a  higher  price  and 
yield  a  greater  return,  why  did  the  traders  not  impose  the 
tax  for  their  own  benefit  ? 

If,  however,  the  producers  of  the  so-called  monopoly  had 
been  competing  with  one  another,  then  it  is  quite  possible 
that  the  imposition  of  the  export  duty  may  cause  a  rise 
to  the  foreign  consumer,  and  if  his  demand  is  highly 
inelastic,  or  he  must  get  his  supply  quand  meme,  he  will 
pay  practically  the  whole  of  the  tax. 

In  this  case  there  would  be  no  check  to  the  export 
trade,  and  accordingly  no  secondary  disturbance  of  the 
home  trade. 

3.  Rules  for  Taxes  on  Consumable  Commodities.  —  The 
general  canons  of  taxation  liave   been   applied   to   frame 

1  See  above  as  regards  import  duties. 


TAXES  OX   COXSUMABLE  COMMODITIES         481 

special  rules  for  taxes  on  commodities.  Only  such  taxes 
should' be  imposed  as  will  yield  a  considerable  revenue,  or, 
in  other  words,  the  taxes  ought  to  be  productive. 

The  canon  of  equality  enjoins  that,  if  possible,  taxes 
should   be    ad   valorem   and   not    specific. 

The  canon  of  certainty  enjoins  that  the  tariff  should  be 
clear  to  all  concerned.  One  great  difficulty  in  ad  valorem 
duties  is  the  uncertainty  as  regards  tests  of  quality. 

The  canon  of  convenience  finds  its  chief  illustration  in 
taxes  on  commodities.  A  large  i-evenue  may  be  raised 
from  commodities  when  the  limits  of  productiveness  by 
direct  taxation  have  long  been  left  behind.  Mill  gives  as 
his  second  rule  that  when  possible  the  tax  should  be  levied 
directly  from  the  consumer.  On  the  ground  of  economy 
this  is  perhaps  theoretically  justifiable,  but  it  breaks  down 
as  regards  convenience.  It  is  much  more  convenient  to  the 
authorities  and  to  the  taxpayers  to  levy  excise  and  cus- 
toms duties  than  to  attempt  to  collect  the  taxes  directly 
from  consumers. 

The  canon  of  economy  also  finds  frequent  illustration 
—  both  positive  and  negative — in  taxes  on  commodities. 
Such  taxes  are  more  costly  than  appears  at  first  sight. 
The  official  statements  of  the  cost  of  collection  of  such 
taxes  cannot  include  the  indirect  cost  through  the  re- 
straints  imposed   upon    trade.^ 

4.  Direct  and  Indirect  Taxes  Compared.  — In  spite  of  the 
evils  that  are  associated  with  indirect  taxation,  and  are  only 
partially  prevented  by  fiscal  improvements,  it  has  been  found 
necessary  by  all  the  great  nations  of  modern  times  to  retain 

1  Cf.  Cliffe  Leslie's  Essay  on  FinanrAal  Heform,  Cobden  Club  Essays 
(1871-1872). 


482  ELEMENTS  OF  POLITICAL  ECONOMY 

customs  and  excise  duties  as  an  important  part  of  the  tax 
system.  In  England,  Russia,  and  France  the  excises  and 
customs  yield  about  half  the  national  revenues.  In  Ger- 
many the  imperial  legislation  regulates  the  customs  and 
excises  on  salt,  tobacco,  spirituous  liquors,  beer,  and  sugar, 
and  with  three  exceptions  the  constituent  States  do  not 
tax  these  things.  In  the  United  States  the  federal  gov- 
ernment draws  most  of  its  revenue  from  excises  and  cus- 
toms in  nearly  equal  proportion.  In  comparing  direct 
and  indirect  taxes  both  must  be  considered  as  parts  of 
the  whole  tax  system.  The  chief  merit  in  either  case 
is  that  the  one  remedies  the  defects  of  the  other.  Both 
are  simply  methods  of  taking  wealth  from  private  per- 
sons for  public  purposes.  In  favour  of  direct  taxes  it 
is  argued  that  the  contributors  know  exactly  what  they 
are  paying,  and  accordingly,  under  a  system  of  represen- 
tative government,  it  is  supposed  that  they  will  exercise 
a  judicious  check  on  expenditure.  On  this  ground  it  is 
a  matter  for  regret  that  in  Britain  the  limit  of  exemption 
from  the  income  tax  has  been  placed  so  high.  On  the 
other  hand,  however,  it  is  maintained  that  direct  taxa- 
tion of  incomes  below  a  certain  minimum  involves  dis- 
proportionate sacrifice,  and  the  mode  of  payment  causes 
a  still  greater  loss.  Direct  taxes  cannot  be  collected 
piecemeal.  It  was  found  in  Germany  that  in  the  case 
of  smaller  incomes  direct  taxes  were  paid  by  selling 
and  pawning  the  furniture  —  an  evil  which  still  pre- 
vails in  spite  of  the  rise  in  the  limit  of  exemption.  Ex- 
cept on  their  first  imposition,  the  amount  of  indirect 
taxes  is  not  known  by  the  taxpayers.  An  old  tax  is 
no   tax   in   many   senses  —  inter   alia   it   seems    to    form 


TAXES  ON  CONSUMABLE  COMMODITIES         483 

part  of  the  natural  or  cost  price.  How  many  of  the 
consumers  of  spirits  and  tobacco  have  any  idea  of  the 
portion  of  the  cost  that  depends  on  taxation?  This 
concealment  of  the  burden,  though  it  may  be  conven- 
ient to  the  taxpayer,  is  likely  to  promote  extravagance 
on  the  part  of  the  government.  Direct  taxation  in 
many  forms  is  liable  to  the  frauds  incident  on  self-as- 
sessment or  other  modes  of  evasion.  The  British  In- 
come Tax  has  furnished  startling  examples,  and  the 
American  property  tax  is  still  more  notorious.  On  the 
other  hand,  taxation  of  commodities  is  a  direct  encour- 
agement to  adulteration  and  to  smuggling.^ 

1  Frinciples,  Chap.  XIII,  aud  works  cited  above. 


CHAPTER  VII 

FREE   TRADE    AND   PROTECTIOlSr 

1.  Meaning  of  Free  Trade.  —  Free  trade  is  sometimes 
used  in  a  loose  popular  sense  as  equivalent  to  laisser  faire 
or  non-interference  ;  but  historically  it  refers  to  a  particular 
policy  as  regards  international  or  foreign  trade.  In  this 
sense  its  principal  characteristics  are  absence  of  differential 
duties  and  of  artificial  encouragements  such  as  bounties  by 
which  the  home  producer  would  be  favoured  as  compared 
with  the  foreigner  in  the  same  industry.  The  essence  of 
free  trade  is  equality  and  uniformity  in  the  financial  treat- 
ment of  home,  colonial,  and  foreign  produce  of  the  same 
kind.  Thus  taxes  on  commodities  for  revenue  purposes 
only,  although  they  are  of  foreign  origin  exclusively  (^e.g. 
tea),  are  not  held  to  infringe  the  rule,  nor  are  duties  on 
imports,  provided  there  are  corresponding  excise  duties  on 
similar  products.  Similarly,  absolute  jDrohibition  of  im- 
ports, if  equivalent  penalties  are  imposed  on  the  home 
production,  does  not  offend  against  the  principle  of  free 
trade  (<?.^.  immoral  books  or  prints).  The  principal  prac- 
tical difficulty  arises  in  the  interpretation  of  "substitutes" 
and  "  similars."  It  is  not  easy  to  find  a  fair  common 
measure  for  home  and  foreign  articles  that  differ  in 
quality.  Thus  with  wines,  beer,  and  spirits  the  alcoholic 
test  alone  is  obviously  unfair;  and  a  simple  ad  valorem 
tax  is  also  inequitable,  because  the  effect  on  demand  will 

484 


FREE   TRADE   AND   PROTECTION  485 

vary  in  different  cases.  In  a  sense,  indeed,  any  taxation 
of  foreign  goods  which  cannot  be  produced  at  liome  (e.c/. 
tropical  produce)  gives  an  artificial  encouragement  to 
home  industries.  If  tea  and  coffee  are  taxed,  the  use  of 
aerated  waters  and  home-made  wines  may  be  encouraged. 
The  case  of  drawbacks  presents  similar  difficulties.  If 
the  drawback  is  exactly  the  equivalent  of  the  duty,  it 
simply  restores  trade  to  the  state  of  freedom ;  but  if  it 
exceeds  the  original  tax,  it  degenerates  into  a  bounty,  and, 
indeed,  most  bounties  on  exports  are  disguised  in  the  form 
of  drawbacks. 

2.  Free  Trade  and  the  Consumer.  —  If  the  question  be 
regarded  solely  from  the  point  of  view  of  the  consumer, 
it  is  easy  to  establish  the  general  case  in  favour  of  free 
trade.  With  freedom  of  competition  no  foreign  com- 
modity would  be  imported  unless  it  could  be  sold  at  least 
as  cheaply  as  when  produced  at  home,  and  in  general  it 
may  be  said  the  foreign  article  would  only  gain  an  entrance 
by  being  offered  at  a  lower  rate.  Thus  to  discourage 
importation  by  taxes  would  be  to  raise  prices.  Free 
imports  encourage  cheapness  and  abundance.  It  may 
also  be  argued  that  free  exports  give  the  greatest  encour- 
agement to  free  imports,  whilst  bounties  on  exports  by 
lessening  the  supply  at  home  raise  prices  to  the  home 
consumer  and  lower  them  to  the  foreigner. 

On  the  whole,  if  the  consumer  only  is  considered,  and 
the  indirect  effects  on  production  are  left  out  of  account, 
free  trade  is  generally  advantageous,  and  the  exceptions 
though  of  theoretical  interest  are  of  relatively  small  im- 
portance. 

It  may  be  objected,  however,  that  all  cheapness  is  rela- 


486  ELEMENTS  OF  POLITICAL  ECONOMY 

tive  to  the  means  of  purchase,  that  is,  to  incomes  of  the 
consumers,  and  that  in  the  last  resort  incomes  depend 
upon  production  in  the  large  sense  of  the  term, 

3.  The  Protection  of  Home  Industries :  General  View.  — 
At  first  sight  it  seems  plausible  to  assert  that  if  foreign 
products  are  wholly  or  partially  excluded  from  the  home 
markets,  there  must  be  so  much  more  employment  for 
home  labour  and  capital,  and  thus  an  increase  of  wages 
and  profits.  The  refutation  of  this  fallacy  in  its  crude 
form  is  one  of  the  greatest  triumphs  of  the  political 
economy  which  the  successors  of  Adam  Smith  rendered 
simple  and  popular.  The  main  positions  in  the  refutation 
are  indeed  derived  from  Adam  Smith.  Bastiat's  petition 
of  the  candle-makers  against  the  sun,  praying  for  the 
closure  of  windows  in  order  that  the  production  of  arti- 
ficial light  (and  all  the  subsidiary  industries)  might  be 
encouraged,  was  probably  suggested  by  Adam  Smith's 
illustration  that  wine  could  be  made  from  grapes  grown 
in  Scotland. 

Again,  the  argument  that  industry  is  limited  by  capital, 
and  that  a  government  cannot  directly  augment  capital, 
and,  consequently,  at  the  best  can  only  determine  the 
direction  and  not  the  volume  of  industry,  is  also  taken 
directly  from  Adam  Smith.  Protection  on  this  view 
may  increase  employment  in  any  favoured  industry,  but 
it  can  only  do  so  by  withdrawing  productive  power  from 
other  industries  in  which  the  country  has  a  greater  natural 
advantage.  The  great  maxim  of  free  traders  that  imports 
must  be  paid  for  by  exports  amounts  to  saying  that  if 
foreign  labour  is  encouraged  by  the  free  admission  of 
foreign  goods,  home  industries  must   be  equally  encour- 


FREE  TRADE   AND  PROTECTION  487 

aged  because  goods  to  an  equal  value  must  be  exported 
to  pay  for  these  goods.  Conversely,  protection  by  pre- 
venting imports  must  discourage  exports.  In  any  case, 
also,  the  very  object  of  protective  duties  is  to  raise  the 
prices  of  the  protected  products  in  the  home  markets, 
and  accordingly  the  consumers  so  far  suffer  and  they 
have  less  to  spend  on  "other  things."  Not  only  do  the 
labourers  lose  as  consumers,  but  protection  to  some 
industries  leads  to  a  lessened  demand  for  the  products 
of  other  industries,  and  "the  mischief  circulates." 

There  is  no  doubt  that  these  elementary  arguments 
embody  important  practical  truths  which,  as  history 
proves,  are  liable  to  be  overlooked.  At  the  same  time, 
hovp-ever,  the  case  for  free  trade  has  been  greatly  weak- 
ened by  neglecting  to  make  clear  the  assumptions  implied 
and  the  qualifications  to  which  they  give  rise. 

4.  The  Assumptions  of  the  General  Argument  for  Free 
Trade.  —  In  the  first  place,  it  is  assumed  that  labour  and 
capital  can  be  turned  without  loss  or  difficulty  from  a 
decaying  into  a  thriving  industry,  and  that  if  any  home 
product  is  displaced  by  foreign  competition,  "something 
else"  can  be  made  immediately  with  the  displaced  pro- 
ductive power.  But  it  may  be  objected  that  every 
industry  requires  a  certain  amount  of  specialised  capital 
and  peculiar  skill  and  training.  There  is  so  much  force 
in  this  objection  that  Adam  Smith  himself  pointed  out 
that  freedom  of  trade  should  only  be  restored  by  slow 
gradations  if  the  employment  of  labour  would  be  endan- 
gered. And,  conversel}'-,  it  may  be  argued  that  "  tempo- 
rary "  protective  duties  should  be  enforced  when  an  old 
industry   is   suddenly   attacked    by   foreign   competition. 


488  ELEMENTS   OF  POLITICAL   ECONOMY 

The  difficulty  of  the  transference  of  capital,  however,  is 
likely  to  be  exaggerated,  and  the  argument  for  vested 
interests  may  be  turned  round.  One  great  practical 
objection  to  "  temporary  "  protective  duties  —  for  what- 
ever reason  granted  —  is  the  danger  of  creating  vested 
interests  which  cannot  be  disturbed  without  some  kind 
of  compensation. 

Secondly^  the  popular  general  argument  assumes  that 
the  capital  and  labour  of  a  country  must  remain  within 
its  own  borders.  This  position  again  is  in  the  main  so 
true  that  it  is  taken  as  the  basis  of  the  theory  of  inter- 
national trade.  But  the  appeal  to  history  also  shows  that 
industries  may  migrate,  not  only  from  place  to  place 
within  a  country,  but  also  from  country  to  country. 
Thus,  foreign  bounties  might  destroy  some  important 
home  industry  which,  even  after  the  removal  of  the 
bounties,  the  country  might  never  recover.  More  gen- 
erally a  free-trade  country  placed  in  the  midst  of  a  group 
of  protectionist  countries  is  liable  to  disturbances  and 
attacks  which  may  vitally  injure  its  industries.  The 
case  of  "  trusts  "  is  at  present  the  most  important.  Pro- 
tected in  the  home  market,  they  can  sell  there  at  monop- 
oly prices ;  and  abroad  they  can  sell  below  cost. 

TJiirdly^  the  maxim  that  imports  are  paid  for  by  exports 
may  be  reversed.  No  doubt  all  trade  is  reciprocal,  but  it 
may  be  said  that  unless  a  country's  exports  are  sent  by  the 
best  route  to  the  best  market,  they  cannot  purchase  so  great 
a  quantity  of  imports,  and  we  may  more  reasonably  regard 
the  export  trade  as  active  and  the  import  trade  as  passive 
than  the  converse.  If,  for  example,  to  take  an  extreme 
case,  other  nations  or  an  important  combination  effectually 


FREE   TRADE  AND  PROTECTION  489 

excluded  English  exports  from  their  markets,  England 
would  be  unable  to  pay  for  her  imports,  and  imports 
must  cease. 

Practically,  no  doubt,  the  foreign  countries  concerned 
could  not  afford  to  lose  the  English  market  for  their  goods 
if  the  closure  were  applied  suddenly  and  extensively,  but 
the  danger  lies  in  the  cumulative  effects  of  foreign  pro- 
tective duties,  and  the  gradual  exclusion  of  Englisli  goods 
from  foreign  markets.  The  natural  remedy  would  appear 
to  be  found  in  commercial  treaties  on  a  reciprocity  basis ; 
but  the  great  difficulty  for  the  free-trade  country  is  that 
it  has  no  particular  advantages  to  offer  in  exchange. 

FourtJtl//,  the  general  argument  assumes  that  so  long 
as  the  capital  of  a  country  can  be  employed  with  equal 
profit,  the  method  of  application  is  a  matter  of  indiffer- 
ence. Not  only  was  this  position  not  approved  of  by 
Adam  Smith,  but  it  was  distinctively  controverted  by  him.^ 

Adam  Smith  used  as  his  principal  test  of  the  advantages 
of  employing  capital,  not  the  rate  of  profit  to  be  obtained, 
but  the  amount  of  labour  employed  in  the  home  country, 
and  the  benefit  derived  from  the  direct  consumption  of 
the  capital. 

Fifthly^  the  popular  argument,  tliat  if  protection  is 
good  for  one  country  against  another,  it  must  also  be  good 
for  one  district,  town,  etc.,  against  others  in  the  same 
country,  which  is  supposed  to  be  a  reductio  ad  ahsurdum 
of  protection,  is,  in  reality,  quite  irrelevant  and  generally 
fallacious.  From  the  national  point  of  view,  the  migra- 
tion of  industries  within  its  borders  is  a  matter  of  indiffer- 
ence, or  rather,  is,  in  general,  a  national  gain.     Thus  the 

1  See  above,  Book  III,  Chap.  XV. 


490  ELEMENTS  OF  POLITICAL  ECONOMY 

abandonment  of  the  mediseval  protectionist  system  in 
which  every  town  protected  itself  against  all  others,  and 
insisted  on  its  "  ancient  customs,"  was  accompanied  by  a 
great  expansion  of  industrial  power;  but,  at  the  same 
time,  while  some  places  waxed,  others  waned.  And, 
although  this  parochial  protectionism  has  disappeared,  the 
commercial  rivalry  of  nations  is  as  strong  as  ever,  and  the 
land  would  fare  ill  from  which  the  capital  and  labour 
migrated,  though  the  rest  of  the  world  might  gain.  There 
is  not  only  the  possibility  of  a  "  something  else,"  but  of 
a  "  somewhere  else  "  to  be  considered ;  and  herein  lies  the 
danger  of  organised  attacks  by  foreign  competitors. 

The  popular  argument  that  the  natural  employment  of 
productive  powers,  which,  at  the  time,  is  most  profitable, 
is  also  both  immediately  and  ultimately  the  most  advan- 
tageous to  a  nation,  also  breaks  down  theoretically  when 
applied  to  particular  cases. 

5.  Theoretical  Exceptions  to  Free  Trade. ^ —  The  prin- 
cipal theoretical  exceptions  to  free  trade  may  be  deduced 
from  the  possible  disadvantages  of  foreign  trade  to  a 
particular  country,  which  was  considered  in  connection 
with  the  general  theory  of  foreign  trade  (Book  III, 
Chap.  XV).  At  this  stage,  where  we  are  rather  con- 
cerned with  the  advisability  of  giving  practical  effect  to 
the  theory,  a  simple  enumeration  of  the  important  cases 
must  suffice. 

It  is  said,^rsi,  that  every  nation  should  retain  for  the 
benefit  of  its  own  people  any  peculiar  natural  resources, 

^  Special  cases  for  the  application  of  protection  would  perhaps  be 
a  better  title  for  this  section.  Compare  Bastable's  International  Trade, 
Chap.  IX. 


FREE   TRADE   AND   PROTECTION  491 

and  if  possible  any  inventions  and  artificial  means  of  jDro- 
duction.  It  is  impossible,  however,  as  regards  the  remote 
future,  to  tell  whether  the  peculiar  value  attached  to 
natural  resources  will  continue,  whilst  the  immediate 
injury  to  trade  is  obvious.  Just  as  sea-coal  displaced 
charcoal,  so  water  power  and  electricity  may  displace 
steam ;  and  as  regards  the  export  of  machinery,  prohi- 
bition is  useless  when  things  can  be  imitated,  and  the 
limitation  of  export  would  check  development. 

A  second  exception  to  free  trade  has  been  urged  on  the 
ground  of  national  independence.  Adam  Smith  apparently 
approved  of  the  principle  of  the  Navigation  Acts,  although 
it  is  generally  forgotten  that  when  dealing  with  colonial 
policy  he  strongly  condemns  all  the  regulations  and  ma- 
chinery by  which  this  principle  was  carried  out.  And  as 
a  matter  of  fact  this  was  the  first  part  of  the  mercantile 
sj'stem  to  be  severely  attacked.  This  argument  of  national 
independence  was  chiefly  relied  on  by  the  opponents  of  the 
repeal  of  the  Corn  Laws,  but  it  now  needs  no  showing 
that  Britain  has  gained  far  more  in  military  strength 
through  the  growth  of  wealth  and  population  than  she 
has  lost  by  the  contraction  of  corn-growing. 

Again,  the  inter-dependence  of  nations  is  mutual,  and 
the  best  guarantee  for  peace  is  the  extension  of  commerce. 

A  third  exception  to  free  trade  is  especially  applied  to 
new  countries.  It  is  argued  that  protection  is  necessary 
to  promote  manufactures  and  the  growth  of  towns,  and 
that  such  development  is  necessary  even  for  the  encourage- 
ment of  agriculture,  e.g.  wheat  and  frozen  meat  may  be 
exported,  but  not  all  the  by-products  of  agriculture,  and 
in  any  case  there  is  a  loss  in  the  cost  of  carriage.     That 


492  ELEMENTS   OF   POLITICAL   ECOXOMY 

the  commerce  of  the  towns  causes  the  greatest  improve- 
ments in  the  country,  and  the  nearer  the  consumer  is 
brought  to  the  producer  the  better,  are  favourite  positions 
of  Adam  Smith. 

It  may  be  answered,  however,  that  temporary  protection 
is  impossible  owing  to  the  creation  of  vested  interests, 
that  new  countries  especially  require  capital,  which  is 
repelled  and  diminished  b}^  protection,  and  that  the  artifi- 
cial forcing  of  new  industries  is  not  advantageous  in  the 
long  run.  Professor  Taussig  has  shown  by  a  detailed 
account  of  the  development  of  the  cotton,  woollen,  and 
iron  manufactures  in  the  first  part  of  the  nineteenth 
century  in  the  United  States  that,  though  all  the  condi- 
tions were  favourable  to  the  protection  of  young  indus- 
tries, little  if  anything  was  gained. 

A  fourth  exception  is  the  celebrated  case  of  retaliation. 
This  has  been  generally  approved,  provided  the  object  is 
to  compel  the  foreigner  to  take  off  objectionable  duties. 
The  practical  objection,  however,  is  that  retaliation  is 
likely  to  provoke  further  retaliation  rather  than  reci- 
procity. 

A  ffth  exception  to  free  trade  is  found  in  the  alleged 
necessity  of  protecting  highly  paid  labour  against  the 
pauper  labour  of  foreign  countries.  It  may  be  replied 
that  high  wages  do  not  make  dear  labour,  and  that  they 
promote  efficienc}^;  and  if  pi'otection  is  necessary  to  keep 
up  the  rate  of  wages,  the  higher  wages  are  a  tax  upon  the 
consumers  of  the  article  produced,  and  in  general  the 
higher  nominal  wages  are  gained  at  the  expense  of  a  fall 
in  real  wages.  Still,  theoretically,  this  exception  is  valid 
under  certain  conditions,  and  cheapness  to  the  consumer 


FREE   TRADE   AND  TROTECTION  493 

may  be  of  less  importance  than  the  well-being  of  the 
producer. 

A  number  of  exceptions  to  free  trade  are  to  a  great 
extent  political  and  social,  and  only  partially  economic 
in  the  narrower  sense.  This  is  partly  true  of  the  cases 
already  noticed,  and  in  other  cases  is  still  more  marked. 
Sometimes  the  object  of  interference  is  to  injure  other 
nations,  as  the  Navigation  Acts  were  mainly  directed 
against  the  Dutch ;  and  sometimes  conversely  to  concili- 
ate by  conceding  advantages,  as  in  the  case  of  the  great 
French  Commercial  Treaty  of  18G0.  The  exclusion  of 
certain  foreign  products  is  sometimes  justified  with  the 
view  of  improving  the  quality  of  home  labour.  No  nation 
would  be  content  to  remain  as  a  hewer  of  wood  and 
grower  of  corn,  and  the  higher  the  forms  of  industry  in 
which  the  workers  are  engaged  so  much  the  better  for 
the  nation  as  a  whole.  The  great  argument  of  Frederick 
List  is  that  protection  is  necessary  for  social  development. 

It  is  assumed  that  if  foreign  wares  of  the  higher  class 
are  excluded,  they  will  be  produced  at  home  by  native 
artists  and  craftsmen.  It  is,  however,  at  least  as  proba- 
ble that  the  absence  of  foreign  competition  would  clieck 
development,  and  that  the  best  way  to  promote  the  higher 
forms  of  industry  is  not  by  the  simple  process  of  exclu- 
sion, but  rather  by  improvements  in  the  education  of  the 
people. 

The  natural  result  of  free  trade  is  to  stimulate  compe- 
tition, invention,  and  variety  of  enterprise,  whilst  the 
natural  result  of  protection  is  to  establish  routine 
methods. 

Finally,  there  are  certain  exceptional  conditions  under 


494  ELEMENTS  OF  POLITICAL  ECONOMY 

which  it  is  theoretically  possible  by  the  judicious  manipu- 
lation of  duties  to  extract  a  certain  amount  of  revenue 
from  the  foreigner.  Such  cases  occur  when  the  country 
in  question  has  either  a  buyer's  or  a  seller's  monopoly ;  in 
the  former  case  it  may  gain  by  import,  and  in  the  latter 
by  export,  duties.  Technically,  duties  of  this  kind  in- 
fringe the  general  maxims  of  free  trade,  and  practically 
they  are  of  little  importance,  and,  so  far  as  practicable, 
are  likely  to  lead  to  retaliation  and  to  foster  national 
animosity. 

On  the  whole,  then,  it  appears  that,  at  any  rate  in  the 
case  of  highly  developed  nations,  although  there  are  many 
cases  "worthy  of  deliberation,"  there  are  very  few  worthy 
of  adoption.  And  this  view  is  strengthened  by  the  nega- 
tive argument  in  favour  of  free  trade  and  by  the  appeal  to 
experience. 

6.  The  Negative  Argument  for  Free  Trade.  —  It  is  one 
thing  to  allow  that  provided  a  government  were  perfectly 
wise  and  perfectly  powerful  —  in  brief,  a  deus  ex  machina 
worked  by  perpetual  motion  —  it  might  impose  such  taxes 
at  its  frontiers  as  would  not  only  yield  a  revenue  in  some 
cases,  but  in  others  would  assist  in  directing  the  labour 
and  capital  of  the  country  into  the  most  advantageous 
channels ;  but  it  is  quite  another  thing  to  admit  that  any 
government  is  capable  of  managing  the  affairs  of  a  great 
nation  in  this  way.  Those  who  quote  Adam  Smith  for 
his  theoretical  exceptions,  forget  that  he  always  laid 
most  stress  on  the  negative  side  of  his  argument ;  that  is 
to  say,  on  the  weakness  and  incapacity  of  governments. 
His  final  opinion  is  that  the  statesman  who  should  attempt 
to  direct  private  people  in  what   manner  they  ought  to 


FREE  TRADE   AND  PROTECTION  496 

employ  their  capital,  is  guilty  of  dangerous  folly  and  pre- 
sumption. This  opinion  is  confirmed  and  illustrated  by 
the  appeal  to  history  elaborated  in  the  fourth  book  of  the 
Wealth  of  Nations.  And,  if  here  and  there  a  few  frag- 
ments of  the  old  policy  have  been  rescued  from  the  general 
wreckage  by  the  labours  of  subsequent  writers,  the  cumu- 
lative effect  of  the  argument  has  hardly  been  weakened. 
Nor  has  it  been  much  affected  by  the  history  of  the  nine- 
teenth century,  if  in  the  interpretation  the  fallacy  of  post 
hoc  ergo  propter  hoc  is  avoided.  In  the  United  Kingdom 
there  can  be  little  question  that  the  rapid  industrial  devel- 
opment that  has  occurred  was  only  possible  through  free 
trade.  And,  as  regards  the  United  States,  it  must  be  re- 
membered that  the  immense  area  over  which  internal  free 
trade  prevailed  was  amply  sufficient  to  secure  most  of  the 
benefits  of  free  competition.  Similarly,  the  recent  experi- 
ence of  German  trade  is  associated  with  the  Zoll-Verein 
over  a  wide  area. 

In  conclusion,  one  other  aspect  of  the  negative  argu- 
ment may  be  emphasised.  As  regards  most  countries,  the 
total  foreign  trade  is  a  minor  part  of  the  whole  trade. 
Even  in  the  United  Kingdom  there  are  at  present  fewer 
persons  employed  in  all  the  textile  trades  than  in  agricul- 
ture. The  aggregate  value  of  the  receipts  of  the  railways 
of  the  United  Kingdom  is  about  equal  in  amount  to  the 
total  value  of  yarns  and  textile  fabrics  exported,  which 
again  is  about  one-third  of  the  total  exports. 

And  not  only  is  the  foreign  trade  only  a  minor  part  of 
the  aggregate  trade  of  most  nations,  but  the  utmost  effect 
of  artificial  restraints  and  encouragements  is  relatively 
still  less.      Protective  duties  and  bounties,  at  the  best, 


496  ELEMENTS   OF   POLITICAL   ECONOMY 

can  only  direct  the  employment  of  a  comparatively  small 
amount  of  the  labour  and  capital  of  a  country  ;  the  greater 
part  will  be  employed  according  to  the  natural  and  ac- 
quired advantages  of  the  country  relatively  to  those  of 
other  countries.  "  The  tariff  system  of  a  country  is  but 
one  of  many  factors  entering  into  its  general  prosperity  " 
(Taussig).^ 

1  Principles,  Chap.  XIV  ;  List,  National  System  of  Political  Economy  ; 
Wealth  of  Nations,  Book  IV ;  Sidgwick,  Political  Economy,  Book  III, 
Chap.  V;  Taussig,  Tariff  History  of  the  United  States  ;  Patten,  Economic 
Basis  of  Protection ;  Bastable,  Theory  of  International  Trade,  also  Com- 
merce of  Nations ;  Gladstone,  Financial  Statements ;  Buxton,  Finance 
and  Politics ;  Dowell,  History  of  Taxation,  Vol.  II ;  Morley,  Life  of 
Cohden;  Arraitage  Smith,  The  Free  Trade  Movement ;  Farrer  and  Giffen, 
The  State  in  its  Belation  to  Trade. 


CHAPTER   VIII 

PRINCIPLES    OF    PUBLIC    EXPENDITURE 

1.  Nature  of  Public  Expenditure.  — "  The  question  of 
expenditure,"  says  Professor  Bastable,  "  is  just  as  much  a 
financial  problem  as  that  of  revenue.  Neither  in  theory 
nor  in  practice  is  it  advisable  to  separate  them  com- 
pletely." The  opinion  of  Mr.  Gladstone  is  still  more 
emphatic,  "Good  finance  consists  more  in  the  spending 
than  in  the  collecting  of  revenue." 

Public  expenditure  is  limited  by  public  revenue,  and 
the  greater  part  of  revenue  (under  actual  conditions)  is 
limited  by  the  productiveness  of  taxes,  by  the  consent 
of  the  taxpayers,  by  the  indirect  effects  on  the  productive 
powers  of  the  country,  and  various  other  economic  and 
political  facts,  which  together  place  an  insuperable  barrier 
to  the  indefinite  expansion  of  taxation. 

The  objects  of  public  expenditure,  on  the  other  hand, 
are  many  in  number,  and  in  no  case  is  it  possible  to  reach 
the  satiety  point.  There  is  thus  a  perennial  struggle 
between  conflicting  claims,  e.g.  the  navy  and  army,  edu- 
cation, poor  relief,  sanitation,  etc.,  and  it  is  difficult  to 
decide  on  the  best  method  of  distribution. 

Under  a  system  of  popular  government  (with  expendi- 
ture constantly  increasing)  a  reference  to  principles  is 
more  than  ever  necessary.  There  are  also  questions  of 
fundamental  importance  regarding  the  best  methods  of 
2  K  497 


498  ELEMENTS  OF  POLITICAL  ECONOMY 

expenditure,  and  we  ought  to  consider  (as  in  taxation) 
the  indirect  as  well  as  the  direct  effects.  And  indeed 
the  treatment  of  taxation  may  in  almost  every  particular 
be  made  the  basis  of  a  similar  treatment  of  expenditure. 

Just  as  taxation  is  compulsory,  from  the  point  of  view 
of  the  sovereign  power,  so  also  from  the  same  point  of 
view  public  expenditure  may  be  said  to  be  arbitrary.  If, 
however,  we  trace  the  historical  development  of  taxation 
and  expenditure,  we  find  that  just  as  the  compulsion  of 
the  former  has  been  modified  by  the  representation  of 
the  taxpayers,  so  also  the  control  of  expenditure  in  the 
interests  of  the  public  has  been  substituted  for  the 
arbitrary  caprice  of  the  sovereign  power.  The  principle 
of  no  expenditure  without  the  consent  of  the  representa- 
tives was,  however,  only  converted  into  a  maxim  of  finance 
long  after  its  analogue  in  taxation  had  been  accepted ;  and 
the  principle  of  appropriation  of  supplies  was  not  definitely 
established  till  after  the  Revolution  of  1689. 

Again,  the  ancient  rule  in  England,  that  all  proposals 
for  expenditure  must  come  from  the  crown,  which  had  its 
origin  in  the  mediaeval  conception  of  sovereign  power, 
has  been  developed  into  the  modern  constitutional  doctrine 
that  the  ministry  is  responsible  for  the  estimates  submitted 
in  the  Budget.  Thus,  although  the  representatives  of  the 
people  may  throw  out  a  government  for  the  expenditure 
it  proposes,  they  cannot  directly  substitute  other  schemes. 

The  furthering  of  the  people's  well-being  was  long  re- 
garded only  as  a  means  to  the  ends  of  the  State.  ''L'Stat 
c'est  moi'"  and  '•'•  pauvre  royaume  pauvre  roV  are  concrete 
expressions  of  the  same  idea. 

The   same   process  of  development  may  be  seen  with 


PRINCIPLES  OF  PUBLIC  EXPENDITURE  499 

regard  to  tlie  management  of  the  industrial  domain  of 
the  State  and  of  royalties  and  similar  sources  of  revenue. 
The  old  idea  was  that,  as  in  the  case  of  private  estates, 
the  property  of  the  crown  should  be  managed  so  as  to 
yield  a  maximum  net  revenue.  The  modern  idea  is  that 
the  production  of  net  revenue  is  altogether  of  secondary 
importance.  The  post-office  and,  since  the  fall  in  silver, 
the  mint,  both  produce  in  England  a  net  revenue,  but  the 
yield  of  revenue  ought  to  be  considered  as  purely  inci- 
dental if  not  accidental.  The  present  tendency  in  local 
finance  to  look  to  municipal  trading  for  the  relief  of  rates 
seems,  from  the  point  of  view  of  history,  regressive  rather 
than  progressive. 

2.  Classification  of  Public  Expenditure.  —  It  might,  per- 
haps, be  thought  of  the  nature  of  a  truism  to  assert  that 
public  expenditure  ought  to  be  for  public  purposes  ;  but 
in  expenditure  as  in  taxation  the  quid  jjro  quo  principle  is 
sometimes  applied. 

It  is  better  to  take  separately  the  two  distinct  ideas  that 
are  blended  in  this  principle;  namely,  the  idea  of  benefit 
and  the  idea  of  payment  made.  As  regards  benefit  alone, 
all  kinds  of  public  expenditure  must  be  held  to  confer  a 
common  benefit  or  to  satisfy  a  public  want  as  their  essen- 
tial justification,  although  they  also  —  all  of  them  —  in- 
cidentally confer  special  benefits  on  individuals  or  classes 
or  localities.  Thus  defence  ostensibly  is  for  the  common 
benefit  only ;  but  as  a  matter  of  history  most  wars  have 
been  undertaken  in  the  defence  of  particular  places  or 
classes  or  even  individuals.  Poor  relief  is  ostensibly  for 
the  benefit  of  the  particular  individuals  concerned ;  but  as 
a  matter  of  public  policy  it  confers  common  benefits  in  the 


500  ELEMENTS   OF  POLITICAL   ECONOMY 

prevention  of  crime  and  in  the  satisfaction  of  the  sense 
of  justice  or  of  charity.  Free  education  manifestly  con- 
fers special  benefits  both  on  the  particular  children  and 
their  particular  parents ;  but,  again,  the  common  benefit 
is  very  great.  Finally,  as  regards  the  expenditure,  which 
is  said  to  confer  only  a  special  benefit  on  mdividuals,  it 
may  be  said  that  the  final  cause  of  all  progress  in  public 
expenditure  has  been  the  abolition  of  this  class.  From 
being  the  greatest,  it  has  become  the  least  in  importance. 
Public  expenditure  which  does  not  confer  some  common 
benefit  or  answer  some  public  purpose,  ought  not  to  exist 
in  the  modern  State.  One  of  the  greatest  financial  re- 
forms has  been  the  substitution  of  the  principle  of  common 
benefit  for  the  benefit  of  particular  "  interests." 

Even  if  the  particular  individuals  benefited  pay  the 
whole  cost  of  the  undertaking,  and,  to  take  a  still  stronger 
case,  even  if  they  pay  so  much  as  to  give  a  profit,  public 
management  is  not  justified  unless  it  can  be  shown  that 
some  public  interest  is  subserved. 

The  payment  for  the  benefit  conferred  ought  not  to 
be  considered  from  the  point  of  view  of  the  individual. 
The  penny  that  is  paid  for  sending  a  letter  to  New  Zea- 
land does  not  in  any  sense  represent  the  benefit  to  the 
particular  individuals  directly  interested. 

The  basis  of  classification  from  this  standpoint  ought 
to  be  the  whole  amount  of  revenue  obtained  by  the  State 
in  return  for  the  services  rendered.  On  this  basis  public 
expenditure  may  be  classified  as  follows :  — 

Flrd^  expenditure  without  any  direct  return  by  way  of 
revenue,  e.g.  poor  relief;  or  in  extreme  cases  even  with 
indirect  loss,  e.g.  expenditure  on  war. 


PRINCIPLES   OF   PUBLIC   EXPENDITURE  501 

Secondly^  expenditure  without  direct  return,  but  with 
indirect  benefit  to  the  revenue,  e.g.  for  education,  it  being 
supposed  that  eventually  the  educated  are  better  tax- 
payers or  cause  less  expense  as  paupers  or  criminals. 

Thirdly.,  expenditure  with  partial  direct  return,  e.g.  edu- 
cation for  which  fees  are  received,  subsidised  railways  that 
pay  part  of  their  expense. 

Fourthly.,  expenditure  that  obtains  a  full  return  or  in 
extreme  cases  yields  a  profit  in  addition,  e.g.  the  post- 
office,  gas-works,  and  generally  state  industries. 

3.  Analogies  from  Taxation.  —  Other  characteristics  of 
taxation  suggest  corresponding  analogies  in  expenditure. 
Corresponding,  for  example,  to  the  illegitimate  evasion  of 
taxes  we  have  the  illegitimate  appropriation  of  public 
funds  —  an  enormous  evil  in  former  times ;  whilst  to 
the  legitimate  evasion  of  taxes  by  the  process  of  substi- 
tution may  be  likened  the  claims  for  doles  and  subven- 
tions from  the  treasury  or  the  evasion  of  the  duty  of  self- 
support. 

All  taxes,  it  has  been  seen,  fall  on  persons,  although 
nominally  imposed  on  things  or  transactions.  The  natural 
correlative  might  appear,  on  first  inspection,  to  be  that  all 
public  expenditure  benefits  particular  persons.  Such  an 
inversion,  however,  is  not  in  conformity  with  the  general 
characteristics  already  described.  It  would  rather  appear 
that  in  public  expenditure  the  benefit  to  the  individual  is 
not  the  primary  consideration.  The  State  must  rather  be 
held  to  spend  public  money  for  public  objects,  and  the 
nature  of  these  objects  is  determined  partly  by  history  and 
tradition,  partly  by  various  political,  religious,  social,  or 
moral  ideas  and  ideals. 


502  ELEMENTS  OF  POLITICAL  ECONOMY 

On  the  strict  analogy  of  the  definition  of  taxation  the 
definition  of  public  expenditure  may  be  formulated  :  — 

Public  expenditure  is  the  distribution  by  the  sovereign 
power  of  the  revenues  of  the  State  for  the  service  of  the 
public  powers. 

4.  The  Principles  of  Expenditure.  —  In  considering  the 
principles  of  public  expenditure  we  may  take  as  a  guide 
the  corresponding  principles  of  taxation.  There  is  then 
much  need  to  emphasise  the  position  that  just  as  demand 
and  supply,  consumption  and  production,  exports  and  im- 
ports, are  correlative  and  inter-dependent,  so  also  are  public 
revenue  and  public  expenditure. 

The  simple  doctrine  of  sovereignty  as  the  basis  of  tax- 
ation finds  its  analogue  in  expenditure  in  the  position  that 
the  State  spends  its  revenues  according  to  the  dictates  of 
the  sovereign  power.  The  further  question,  however,  at 
once  arises,  What  should  determine  the  dictates  of  the 
sovereign  power  ?  The  general  answer,  as  in  the  case  of 
taxation,  is  that  the  money  should  be  used  in  the  manner 
most  conducive  to  the  public  interest.  It  took  many 
centuries  to  convert  this  saying  from  a  paradox  into  a 
truism. 

It  may  also  be  argued,  pursuing  the  former  line  of  in- 
quiry, that  one  great  public  interest  is  justice,  and  that 
the  analogue  to  equality  of  sacrifice  in  taxation  is  equality 
of  benefit  in  expenditure.  But  even  as  regards  taxation,  it 
has  been  shown  that  equality  of  sacrifice,  considered  as  the 
ultimate  basis  or  test,  is  open  to  serious  objections,  and 
these  objections  are  far  stronger  when  applied  to  the  con- 
verse case  of  equality  of  benefit  in  expenditure.  The 
greater  part  of  public  expenditure  is  for  public  objects  in 


PRINCIPLES   OF   PUBLIC   EXPENDITURE  603 

which  no  attempt  can   be  made  to  distribute  the  benefit 
amongst  individuals,  e.g.  the  cost  of  defence. 

The  ideal  of  minimum  sacrifice,  or  disutility,  seems  much 
better  adapted  than  equality  of  sacrifice  for  conversion 
into  a  maxim  of  expenditure.  The  natural  analogue,  it 
may  be  said,  to  minimum  disutility  in  taxation,  is  maximum, 
utility  in  expenditure.  And  although  the  application  of 
the  conception  is  rather  formal  than  material,  it  may  be  of 
service  as  a  regulative  idea  and  as  a  destroyer  of  fallacies, 
especially  when  expressed  with  reference  to  total  and 
marginal  utilities.  There  is  no  more  popular  fallacy  than 
to  suppose  that  because  some  kinds  of  public  expenditure 
are  classed  as  necessary,  therefore  they  must  always  rank 
before  those  which  are  only  classed  as  optional.  Although 
the  utilitarian  calculus  cannot  be  applied  very  far,  the 
distinction  between  total  and  final  utility  may  often  indi- 
cate the  necessity  of  checking  extravagance  in  one  direc- 
tion and  beginning  expenditure  in  another.  A  minimum 
amount  of  defence  or  protection  may  have  assigned  to  it 
an  infinite  utility,  but  the  utility  rapidly  diminishes,  and 
necessity  passes  into  luxury  or  display.  The  ideal  of  public 
expenditure  on  the  utilitarian  principle  would  be  attained 
when  the  public  utility  of  the  marginal  expenditure  in 
each  case  is  equal. 

The  most  popular  application  of  the  utility  theory  is 
in  favour  of  increasing  the  expenditure  on  the  poor  and 
needy.  Logically,  however,  the  principle  may  be  applied 
in  favour  of  diminishing  public  expenditure  on  the  rich 
or  less  needy.  From  this  point  of  view  the  idea  of  mak- 
ing old  age  pensions  universal  is  absurd;  to  the  poor  in 
very  deed,  and  to  the  deserving   poor  in  particular,  the 


504  ELEMENTS   OF   POLITICAL   ECONOMY 

utility  of  a  moderate  pension  would  be  very  great ;  but  to 
those  already  provided  for  by  children  or  friends  the  pen- 
sion would  be  a  bad  substitute  for  natural  charity. 

On  the  same  principle  tliere  is  no  reason  why  education 
should  be  free  in  all  cases  because  in  the  public  interest 
it  is  made  free  in  some. 

The  maxim  that  the  State  should  not  do  for  people 
what  they  can  do  for  themselves,  may  also  be  supported 
on  the  principle  under  consideration.  It  may  well  happen 
that  state  aid,  which  is  very  useful  in  extreme  cases  of 
poverty,  becomes  less  and  less  useful  as  we  ascend  in  the 
social  scale,  and  finally  becomes  harmful  or  mischievous. 

The  application  of  the  facultij  theory  to  expenditure 
gives  as  the  first  result  that  the  standard  must  be  objec- 
tive, not  subjective.  Such  an  objective  standard  is  pro- 
vided in  the  constitutional  rule  that  the  money  voted  by 
the  popular  assembly  is  appropriated,  and  can  only  be 
applied,  to  certain  specified  kinds  of  expenditure.  The 
taxes  that  are  levied  according  to  faculty  are  expended 
according  to  public  requirements,  which  admit  of  a  defi- 
nite, concrete  statement.  The  apportionment  amongst  these 
public  requirements  is  determined  by  the  representative 
government,  which  again  represents  various  ideas  and 
various  interests. 

The  social  and  political  effects  of  public  expenditure 
are  generally  of  even  greater  importance  than  in  the 
converse  case  of  taxation.  The  primary  object  of  taxation 
is  to  raise  revenue ;  the  social  effects  are  indirect  and  sec- 
ondary. But  the  very  object  of  public  expenditure  is  to 
attain  certain  social  and  political  ends.  The  correspond- 
ing analogue,  however,  to  this  aspect  of  taxation,  seems 


PRINCIPLES   OF   PUBLIC   EXPENDITURE  605 

rather  to  be  that  in  expenditure  also  there  may  be  indirect 
and  secondary  effects  which  sometimes  are  considered  of 
more  importance  than  the  primary  or  ostensible  object. 
The  ulterior  effects  may  altogether  exceed  in  benefit  the 
immediate  results,  as  in  the  claim  made  for  free  education. 
On  the  whole,  it  may  be  said  that  in  public  expenditure 
(as  in  taxation)  great  care  should  be  taken  to  avoid  in- 
direct evils,  and  the  hopes  placed  on  indirect  benefits 
should  not  be  exaggerated.  These,  no  doubt,  are  formal 
counsels,  but  they  are  none  the  less  useful  guides  for  the 
arrangement  of  facts;  and  the  reference  to  history  shows 
their  vital  importance,  —  witness  the  indirect  effects  of 
public  expenditure  on  the  church,  the  poor,  and  the  privi- 
leged classes. 

The  principle  of  formal  justice  may  also  be  applied  to 
expenditure.  If  public  money  is  spent  on  any  public 
object,  it  should  be  spent  on  other  objects  that  are  practi- 
cally similar.  The  Kantian  imperative,  "  Act  on  a  maxim 
which  thou  canst  will  to  be  law  universal,"  is  certainly  the 
golden  rule  for  the  exchequer.  It  must  be  observed,  how- 
ever, that  special  benefit  may  be  conferred  on  one  class  or 
area  or  industry,  without  infringing  this  maxim,  if  thereby 
the  public  would  benefit  —  whilst  in  other  cases  apparently 
similar  this  would  not  be  the  case.  The  actual  expen- 
diture of  public  money  for  defence  no  doubt  benefits  cer- 
tain districts,  e.g.  naval  ports  and  military  centres,  and  it 
benefits,  also,  certain  industries  ;  but  such  particular  bene- 
fit is  only  secondary  and  conditional.  The  real  object 
ought  to  be  efficiency  in  case  of  war,  and  not  false  charity 
in  time  of  peace. 

The  great  use  of  the  rule  is  negative :  never  act  on  a 


506  ELEMENTS   OF   POLITICAL  ECONOMY 

principle  that  cannot  be  extended,  e.g.  do  not  give  to  the 
Irish  cottar  what  you  will  not  give  to  the  Scottish  crofter. 
It  may,  however,  be  admitted  that  sometimes  the  State 
should  revert  to  the  mediaeval  device  of  making  experi- 
ments, limited  in  various  ways  in  time  and  place. 

Much  of  the  public  expenditure  for  local  purposes  is 
provided  by  local  taxation.  If  the  benefit,  e.g.  a  public 
garden,  is  purely  local,  the  poorer  localities,  on  this  prin- 
ciple, have  no  claim  on  the  central  government  or  on 
richer  areas  for  assistance  in  providing  the  benefit;  but 
conversely,  if  the  expense  is  to  fulfil  a  public  duty,  e.g. 
compulsory  education,  such  a  claim  holds  good  and  is 
generally  recognised. 

Public  expenditure  ought  to  be  definite  and  certain.,  and 
open  to  public  criticism.  The  appeal  to  history  is  decisive, 
both  as  to  the  reality  and  the  importance  of  this  rule.  The 
secrecy  in  respect  to  public  revenue  and  expenditure  that 
was  formerly  so  noticeable,  and  which  has  been  expelled  by 
the  growth  of  constitutional  government,  had  extremely 
injurious  effeclo.  On  the  one  hand,  prodigality  and  injus- 
tice often  escaped  notice ;  while  on  the  other  hand,  fair  and 
legitimate  taxation  and  expense  were,  through  ignorance, 
frequently  regarded  as  grievances.  Publicity  and  respon- 
sibility have  been  shown  by  a  lengthened  experience  to 
be  necessary  conditions  for  an  efficient  administration  of 
finance.  The  efficiency  of  the  machinery  depends  in  the 
last  resort  on  the  practical  wisdom  and  the  incorruptibility 
(direct  and  indirect)  of  the  individuals  who  represent  the 
people. 

In  practice,  also,  publicity  involves  an  independent  and 
searching  audit.     "  Of  all  expedients  for  the  preservation 


PRINCIPLES  OF  PUBLIC   EXPENDITURE  507 

of  public  property,  it  is  the  most  simple,  ready,  and  self- 
acting." 

The  canon  of  convenience  may  be  best  illustrated  from 
the  opposite.  The  local  finance  of  England  afforded  a 
striking  example,  until  the  recent  reforms,  of  the  incon- 
venience of  a  multitude  of  boards  spending  money  for 
different  objects.  "  The  truth  is,  we  have  a  chaos  as 
regards  authorities,  a  chaos  as  regards  rates,  and  a  worse 
chaos  than  all  as  regards  areas"  (Mr.  Goschen  in  1871). 

One  great  difficulty  in  the  control  of  expenditure  is  to 
reconcile  the  necessary  routine  of  official  practice  with  the 
convenience  of  the  public.  This  difficulty  is  most  serious 
and  noticeable  in  times  of  war  or  other  public  strain,  al- 
though at  all  times  the  inconvenience  associated  with  red 
tape  is  proverbial. 

In  general,  however,  the  canon  of  convenience,  in  the 
larger  sense  of  the  term,  may  be  brought  under  the  canon 
of  economy. 

Magnum  parsimonia  est  vectigal  ought  to  be  applied  in 
every  budget ;  parsimony  in  one  direction  may  avoid  tax- 
ation in  another.  The  usual  practical  rules  by  which 
economy,  in  this  narrow  sense,  is  attained  must,  however, 
be  widely  extended  with  the  development  of  the  term 
economy. 

Economy  in  the  means  is  the  natural  corollary  of  equity 
in  the  objects  of  expenditure.  The  aim  ought  to  be  to 
attain  these  objects  in  the  most  effective  manner.  Any- 
thing that  is  paid  by  government  beyond  what  is  requisite 
for  efficiency  is  inequitable ;  it  benefits  one  class,  or  rather 
a  few  members  of  one  class,  at  the  expense  of  the  public. 
It  is  true,  no  doubt,  that  there  is  room  in  state  expendi- 


508  ELEMENTS  OF   POLITICAL  ECONOMY 

ture  also  for  the  economy  of  high  wages,  and  even  in  the 
purchase  of  materials  the  dearest  may  be  the  cheapest  with 
governments  as  with  individuals ;  but  high  wages  are  only 
economical  in  proportion  to  efficiency,  and  high  prices  in 
proportion  to  quality.  At  the  present  time  there  is  a  re- 
crudescence of  an  old  fallacy :  that  the  government  ought 
to  set  the  example  of  paying  high  wages  —  from  the  low- 
est to  the  highest  appointments.  The  idea  seems  to  be 
that  the  chief  factor  in  the  determination  of  wages  ought 
to  be  the  benevolence  of  the  employer,  and  that  as  the 
government  obtains  its  funds  without  any  real  cost,  its 
benevolence  should  be  so  much  the  greater.  Neither  sup- 
position will  bear  analysis. 

Similarly,  as  regards  the  purchase  of  commodities,  it  is 
sometimes  thought  that  the  government  ought  to  give 
more  than  private  people.  Economically  it  ought  to  give 
less.  It  buys  in  larger  quantities,  its  payments  are  cer- 
tain, and  its  custom  is  valuable  as  an  advertisement.  And 
if  in  a  case  of  need  or  of  monopoly  the  State  has  a  right 
to  modify  prices  in  the  public  interest,  so  it  may  also 
modify  them  in  the  interest  of  its  own  administration  of 
public  affairs. 

The  principle  of  economy  may  sometimes  be  applied  di- 
rectly as  a  check  on  state  enterprise.  All  unproductive 
expenditure  involves  taxation,  and  all  productive  expen- 
diture that  is  to  pay  its  cost  must  either  be  a  monopoly 
which  so  far  involves  taxation,  or  it  must  be  conducted 
like  any  other  business.  If  private  enterprise  or  volun- 
tary association  is  sufficient  to  meet  any  public  want,  the 
government,  whether  central  or  local,  should  generally  let 
it  alone.     The  chance  of  profit  is  balanced  by  the  chance 


PRINCIPLES  OF  PUBLIC   EXPENDITURE  509 

of  loss,  and  the  simple  plan  of  taxation  is  preferable  to 
speculation  for  profit  as  a  method  of  providing  public 
funds. 

A  number  of  subordinate  or  derivative  rules  of  expendi- 
ture may  be  derived  from  the  clue  afforded  by  taxation. 
Government  expenditure  should  be  directed  to  a  com- 
paratively small  number  of  great  objects,  and  not  to  a 
multitude  of  small  affairs.  A  driblet  here  and  there  is 
sure  to  offend  against  the  canons  of  equity  and  economy. 
Grants  in  aid  tend  to  be  given  in  response  to  popular 
clamour  or  as  rewards  for  political  services,  and  so  far 
take  the  place  of  the  ancient  pensions  and  direct  bribery 
of  the  representatives  of  the  people.  It  is  sometimes  said 
government  should  do  a  certain  thing  because  the  expense 
is  trifling.  A  trifling  expense,  on  the  contrary,  shows,  as 
a  rule,  that  it  is  no  fit  matter  for  governmental  action. 
Trifling  expenses  ought  to  be  met  from  the  small  change 
of  charity,  not  from  the  millions  of  public  revenue ;  if 
necessary,  they  should  be  the  occasion  not  of  appeals  to 
government,  but  to  persons. 

A  good  system  of  expenditure  should  as  far  as  possible 
be  self-regulating ;  it  should  expand  (and  contract)  with 
the  public  requirements.  With  growing  wealth  and  popu- 
lation it  is  necessary  to  provide  for  increasing  expenditure, 
and  the  various  departments  should  be  so  constituted  as  to 
admit  of  natural  expansion.  At  the  present  time  this  rule 
ought  to  be  specially  applicable  in  the  provision  for  the 
naval  and  military  services.  Again,  contraction  of  ex- 
penditure according  to  lessened  requirements  in  certain 
branches  is  necessary  both  for  economy  and  substitution. 
The  expenditure  also,  in  the  various  departments,  ought  to 


510  ELEMENTS  OF  POLITICAL  ECONOMY 

be  accurately  estimated.  In  practice,  the  normal  expendi- 
ture should  be  met  from  normal  revenue.  Supplementary 
votes  and  extraordinary  demands  should  be  avoided  as  far 
as  possible  —  otherwise  the  control  of  Parliament  becomes 
nominal.  It  is  bad  policy  if  Parliament  is  only  made  to 
sanction  expenditure  already  accomplished. 

In  the  progress  of  society,  moreover,  it  is  necessary  to 
incur  new  modes  of  expenditure.  No  provision  of  machin- 
ery to  meet  old  wants  will  suffice  for  the  satisfaction  of 
new  demands.  In  many  cases,  however,  the  expense  ought 
to  be  met  not  by  increased  taxation,  but  by  substitution. 
With  increase  of  wealth  the  increasing  demands  for  educa- 
tion ought  to  be  partially  met,  at  any  rate,  by  diminished 
demands  from  the  poor ;  as  the  education  rate  rises,  the 
poor  rate  ought  to  fall. 

Finally,  in  case  of  a  conflict  of  rules,  if  a  compromise  is 
impossible,  the  guidance  of  the  stronger  must  be  accepted. 
It  may  be  said,  for  example,  of  expenditure,  with  still  more 
force  than  of  taxation,  that  a  considerable  degree  of  in- 
equality is  preferable  to  a  small  degree  of  uncertainty ; 
inequality  only  affects  the  private  interests  of  particular 
persons,  whilst  uncertainty  vitiates  the  whole  system  of 
public  administration.  1 

^Principles,  Chaps.  XV,  XVI;  Bastable,  Public  Finance ;  Wealth  of 
Nations,  Book  V;  Plehn,  Public  Finance. 


CHAPTER   IX 

COLONIES   AND   DEPENDENCIES 

1.   Early  History  of  British  Colonies  and  Dependencies. — 

As  in  the  case  of  other  European  nations,  most  of  the 
British  colonies  were  founded,  and  most  of  the  dependen- 
cies acquired,  under  the  influence  of  political  ideas  and 
ideals  that  would  no  longer  be  tolerated.  Take  first  the 
case  of  colonies.  It  might  naturally  be  supposed  that  the 
pressure  of  population  and  of  capital  at  home  gave  a  stimu- 
lus to  colonisation,  as  in  the  case  of  the  old  Greek  cities. 
It  was,  however,  not  the  overflow  of  well-being,  but  of 
disorder  and  injustice  in  Europe  which  peopled  and  culti- 
vated America.  1  Religious  persecution  and  political  in- 
tolerance drove  out  Puritans,  Quakers,  Catholics,  and  Jews 
to  make  new  settlements.  Later  on,  the  transportation  of 
criminals  relieved  the  prisons  of  the  home  country  and  pro- 
vided the  colonial  plantations  with  labour.  The  colonial 
labour  market  was  further  replenished  by  kidnapping  and 
so-called  apprenticeship,  and  by  the  importation  and  rear- 
ing of  slaves. 

As  the  colonies  grew  in  wealth,  the  mother  country 
paid  them  more  attention.  The  most  obvious  device  to 
obtain  a  large  share  of  that  wealth  for  itself  was  to  pre- 
vent it  going  to  other  countries,  and  an  elaborate  system 
was  devised  for  the  monopoly  of  the  colonial  trade.    "  The 

1  See  Wealth  of  Nations,  Book  TV,  Chap.  VII. 
511 


612  ELEMENTS   OF   POLITICAL   ECONOMY 

maintenance  of  the  monopoly,"  said  Adam  Smith,  just 
before  the  revolt  of  the  American  colonies,  "  has  hitherto 
been  the  principal,  or  more  properly,  perhaps,  the  sole  end 
and  purpose  of  the  dominion  which  Great  Britain  assumes 
over  her  colonies." 

At  the  very  time  when  Adam  Smith  was  writing  it 
occurred  to  some  of  the  most  foolish  and  ignorant  of  our 
rulers  that  it  would  be  an  excellent  thing  to  impose  taxes 
on  the  colonies  for  imperial  purposes ;  and  by  the  famous 
duties  on  tea  they  succeeded  in  raising  about  <£300  and 
in  losing  the  American  colonies. 

It  might  naturally  be  supposed  that  this  sharp  lesson 
would  have  established,  immediately  and  forever,  the  prin- 
ciple of  non-interference  in  colonial  affairs.  But  the  con- 
trary was  the  case.  The  colonies,  however  popular  their 
institutions,  were  really  governed  by  British  ministers  from 
Downing  Street.  In  crown  colonies  this  power  was  ex- 
ercised directly  ;  in  the  free  colonies  it  was  exercised 
indirectly,  through  the  governors  and  their  councils.  Self- 
government  was  there  in  theory,  but  in  practice  the 
governors  ruled  according  to  orders  from  England,  and 
were,  in  general,  able  by  devious  means  to  command  the 
consent  of  the  local  legislators.^  Very  often  the  inter- 
ference was  more  direct.  Acts  affecting  only  the  internal 
affairs  of  the  colonies  were  disallowed  by  ministers  at 
home.  The  public  lands  were  considered  the  property  of 
the  crown,  and  often  obnoxious  grants  were  made.  Even 
religious  institutions  and  endowments  were  regulated  from 
home.  One  of  the  greatest  abuses  was  patronage.  Infants 
in  the  cradle  were  endowed  with  colonial  appointments, 

1  Cf.  Erskine  May,  Vol.  Ill,  p.  100. 


COLONIES  AXI)   DEPENDENCIES  513 

to  be  executed  through  life  by  convenient  deputies.  Ex- 
travagant fees  and  salaries  were  granted  by  England, 
raised  by  tlie  colonies,  and  spent  in  England.  Politicians 
who  consented  to  exile  themselves  to  the  colonies  were, 
in  general,  those  who  were  wholly  unfit  for  employment 
at  home. 

It  is  not  surprising  that  the  first  years  of  the  reign 
of  Victoria  were  marked  by  a  rebellion  in  Canada. 
The  wonder  is  that  Britain  contrived  to  retain  her 
dominion. 

The  retention  of  dominion,  indeed,  was  effected  through 
the  abandonment  of  the  powers  of  irritation  and  abuse. 
To  Canada,  over  fifty  years  ago,  and  to  other  free  colonies, 
as  they  obtained  sufficient  importance,  the  principle  of 
responsible  government  was  conceded.  It  is  beyond  the 
sphere  of  economics  to  describe  the  nature  and  effects  of 
these  political  concessions  or  recognitions.  Suffice  it  to 
say,  that  the  general  result  is  that  a  colonial  constitution 
has  become  "  the  image  and  reflection  of  parliamentary 
government  in  England."  And  just  as  the  crown  in 
Britain  has  gained  in  popularity  what  it  has  lost  in 
nominal  power,  through  the  transference  of  the  supreme 
authority  to  the  representatives  of  the  people,  so  also  the 
mother  country,  by  accepting  to  the  full  the  principles  of 
local  self-government,  has  strengthened,  and  in  many 
cases  has  created,  the  far  more  real  bonds  of  affection. 

With  regard  to  the  dependencies,  of  which  India  may 
be  taken  as  the  most  marvellous  example  which  the  world 
has  ever  seen,  for  a  long  period  they  also  were  given  over 
to  patronage  and  plunder  and  to  all  the  methods  of  ex- 
ploitation  invented   by  unfettered  companies.     But  with 

2  L 


514  ELEMENTS  OF  POLITICAL  ECONOMY 

the  transfer  of  the  powers  and  territories  of  the  old  East 
India  Company  to  the  crown  came  the  recognition  that 
the  primary  duty  of  the  British  government  was  to 
promote  the  large  human  interests  of  the  millions  of 
India,  and  not  the  narrow,  pecuniary  interests  of  a  few 
British  adventurers  —  great  spirits  though  many  of  them 
were. 

Thus  it  would  appear  that  the  extraordinary  growth 
of  affection  on  the  part  of  the  "  possessions  "  toward  the 
"  possessor  "  during  the  reign  of  Victoria  is  to  be  ascribed 
mainly  not  to  the  conscious  efforts  of  statesmen  to  carry 
out  their  ideas  of  "  tightening  the  ties "  of  connection, 
but  to  the  fortunate  failures  of  such  attempts ;  it  is 
to  be  ascribed,  not  to  the  strengthening,  but  to  the 
relaxing,  of  the  powers  of  the  central,  or  imperial, 
government. 

This  relaxation  is  seen  especially  in  the  abandonment  of 
the  remains  of  the  old  system  of  commercial  monopoly. 
The  recent  denunciation  of  the  commercial  treaties  with 
Belgium  and  Germany,  and  the  grant  to  the  colonies  of 
essentially  coordinate  power  in  making  such  treaties,  may 
be  taken  as  the  final  step  in  the  transition  from  monopoly 
to  freedom.  "The  mother  country^  claims  to  be  included 
on  the  '  most  favoured  nation '  footing- :  the  colonies 
cannot  discriminate  against  a  foreign  state  to  which  the 
mother  country  has  by  treaty  granted  the  '  most  favoured 
nation '  clause ;  no  colony,  by  direct  or  indirect  negotia- 
tion, is  to  obtain  an  advantage  at  the  expense  of  any  other 
part  of  the  empire,  and  should  it  obtain  any  concession 

1  See  the  historical  survey  in  Professor  J.  Davidson's  Commercial  Fed- 
eration and  Colonial  Trade  Policy,  Chap.  II. 


COLONIES  AXD  DEPEXDEXCIES  515 

by  way  of  preference  from  a  foreign  country  the  imperial 
government  would  endeavour  to  obtain  similar  privileges 
for  the  rest  of  the  empire.  These  restrictions  seem  to  con- 
stitute a  minimum  of  empire,  and  weak  as  they  are  they 
are  only  retained  by  consent." 

2.  The  Profit  and  Loss  to  the  Mother  Country  of  Colonies 
and  Dependencies.  —  If  now,  in  the  light  of  this  broad 
historical  survey,  we  inquire  what  is  the  balance  of  profit 
and  loss  to  Great  Britain  of  this  immense  empire  of  colo- 
nies and  dependencies,  the  answer  at  first  sight  does  not 
appear  to  be  very  satisfactory,  and  the  popular  opinion 
that  "  something  ought  to  be  done  "  toward  closer  union 
seems  plausible. 

One  after  another  the  possible  advantages  of  empire 
seem  to  have  been  abandoned  or  to  have  fallen  short  of 
realisation.  Consider  the  question  of  revenue  and  ex- 
penditure. The  great  source  of  expense  is  found  in  the 
navy  and  army.  The  larger  part  of  the  expense  is  in- 
curred, not  for  the  defence  of  Great  Britain  and  Ireland, 
but  for  the  empire ;  and  though  India  and  the  colonies 
may  be  called  on  to  meet  part  of  the  expenditure  for  local 
defence,  they  contribute  practically  nothing  to  the  expenses 
of  the  imperial  government.  Again,  take  the  interest  on 
the  national  debt.  This  debt  is  almost  entirely  due  to 
wars  for  the  maintenance  and  extension  of  empire,  and 
not  simply  for  the  defence  of  the  home  country ;  but  the 
United  Kingdom  alone  pays  the  interest  and  bears  the 
burden. 

It  is  true  that  the  recent  war  has  revealed  a  surprising 
depth  of  filial  affection  on  the  part  of  the  colonies  and  of 
India,  and  the  former  have  contributed  men  and  the  latter 


516  ELEMENTS   OF   POLITICAL   ECONOMY 

horses  and  material ;  but  per  contra  the  war  itself  with  its 
enormous  expense  was  a  war,  in  the  first  place,  in  the  inter- 
ests of  certain  colonies,  and  not  in  the  interests  of  the 
mother  country,  that  is  to  say,  if  interest  is  to  be  meas- 
ured by  pecuniary  gain.^ 

3.  Trade  and  the  Flag.  —  It  may  perhaps  be  thought 
that  though  we  lose  directly  by  the  expense  of  our  fleets 
and  armies,  we  gain  far  more  indirectly  through  the  ex- 
tension of  our  trade.  In  dealing  with  this  argument  two 
distinct  questions  must  be  carefully  separated.  In  the 
first  place,  it  is  undoubtedly  true  that  this  country  de- 
pends for  the  necessaries  of  existence  —  for  food  and  raw 
materials  of  manufacture  —  upon  supplies  drawn  from 
abroad;  and  it  follows,  as  was  admitted  by  Cobden,  that 
we  ought  to  keep  the  supremacy  of  the  sea.  But  in  the 
second  place  it  is  by  no  means  so  true  that  this  extension 
of  foreign  trade  has  been  due  mainly  to  the  extension  of 
empire,  and  that  this  extension  of  empire  has  increased 
the  security  of  our  foreign  trade.  A  few  significant  facts 
will  show  that  if,  to  some  extent,  trade  follows  the  flag, 
to  a  much  greater  extent  trade  pays  no  regard  to  flags. 
Our  aggregate  trade  with  foreign  countries  (including 
exports  of  British  produce  and  imports)  is  nearly  three 
times  as   great   as  with  our    colonies    and   dependencies ; 

1  "  You  will  find  that  every  war,  great  or  small,  during  the  reign  of 
Victoria,  in  which  we  have  been  engaged,  has  had  at  bottom  a  colonial 
interest,  the  interest,  that  is  to  say,  either  of  a  colony  or  of  a  great  de- 
pendency like  India.  That  is  absolutely  true,  and  is  likely  to  remain  true 
to  the  end  of  the  chapter.  If  we  had  no  empire,  there  is  no  doubt  that 
our  military  and  naval  resources  would  not  require  to  be  maintained  at 
anything  like  the  present  level."  Mr.  Chamberlain,  as  Colonial  Secretary, 
at  the  conference  of  colonial  premiers  in  London  in  1897.  See  Beport  of 
Proceedings,  p.  7  (C— 8696). 


COLONIES   AND   DEPEXDEXCIES  617 

our  imports  from  the  United  States  are  greater  than  the 
wliole  of  tlie  imports  from  all  the  British  dominions.^ 

Nor  can  it  be  said  that  our  trade  is  more  secure  owing 
to  this  vast  and  unwieldy  extension  of  empire.  Probably, 
indeed,  the  reverse  is  the  case ;  the  United  Kingdom,  as 
such,  would  be  stronger  with  a  concentration  of  empire  in 
places  specially  adapted  for  the  maintenance  of  a  sea  power. 

The  other  commercial  advantages  which  are  supposed 
to  follow  from  the  possession  of  colonies  also  become 
much  attenuated  when  tested  by  facts.  The  surplus 
capital  and  the  surplus  labour  of  this  country  flow  at 
least  as  readily  to  the  United  States  as  to  any  of  our 
colonies.  From  1853  to  1898  the  total  emigration  of 
persons  of  British  or  Irish  origin  was  8,549,569,  of  whom 
5,690,712  went  to  the  United  States.  The  makers  of 
modern  empires  have  lost  the  Roman  art  of  deportation : 
the  Romans  would  have  subdued  the  Transvaal  with  the 
mountain  tribes  of  India,  and  civilised  India  by  turning  the 
stream  of  Irish  emigrants  from  America.  But  though 
we  have  imitated  the  Romans  unconsciously  perhaps,  but 
effectively,  in  the  art  of  amalgamation,  —  by  sparing  the 
weak  and  warring  down  the  proud,  by  encouraging  also 
tribal  wars,  and,  generally,  by  making  the  Briton  a 
modern  Roman  citizen,  any  accidents  to  whom  must  be 
compensated  in  territory,  —  we  have,  perforce,  abandoned 
this  simple  method  of   deportation.     The   colonies   long 

1  In  1898 — a  normal  year  —  the  aggregate  trade  (imports  and  exports 
of  British  produce)  with  foreign  countries  was  £520,877,107  ;  with  Brit- 
ish possessions,  £182,660,716.  In  1898  the  imports  from  the  United 
States  were  £126,062,155,  and  from  all  British  possessions,  £99,433,995. 
The  total  imports  were  £485,035,583,  that  is  to  say,  the  imports  from 
British  possessions  were  about  one-fifth  of  the  whole. 


518  ELEMENTS  OF  POLITICAL  ECONOMY 

since  refused  to  take  our  criminals,  and  they  are  now 
drawing  the  line  at  our  paupers  and  Asiatics.  In  brief, 
our  foreign  trade  and  the  migration  of  labour  and  capital 
are  determined  mainly  by  economic,  and  not  by  political, 
considerations.  Labour  follows  wages ;  capital  follows 
profits ;  and  neither  follows  the  flag.  It  is  of  course 
possible  that  if  a  foreign  power  acquired  India,  it  would, 
by  prohibitive  duties,  exclude  British  goods ;  but  esti- 
mated merely  by  profit  and  loss,  India  does  not  pay  the 
British  taxpayer  either  directly  or  indirectly. 

4.  Imperial  Federation.  —  The  only  "  thorough  "  scheme 
for  imperial  federation  ever  propounded  is  that  given  by 
Adam  Smith  in  the  concluding  chapter  of  the  Wealth  of 
Natioiis.  It  is,  probably,  far  too  thorough  for  acceptance 
by  the  feebler  folk  of  to-day.  His  scheme  was  based  on 
imperial  taxation  throughout  the  empire,  and  representa- 
tion in  proportion  to  taxation.  He  contemplated  the  pos- 
sibility of  the  transfer  of  the  seat  of  political  power  across 
the  Atlantic  in  little  more  than  a  century ;  and  but  for  the 
political  accidents  which  occurred  as  he  wrote,  the  present 
United  States  would  have  been  the  strongest  part  of  the 
British  empire,  both  in  wealth  and  population,  that  is, 
so  far  as  the  English-speaking  races  are  concerned.  If, 
however,  the  education  and  political  emancipation  of  the 
"  black  man  "  had  advanced  in  India  as  in  America,  and 
the  franchise  were  not  tempered  by  property  qualifications, 
India  would  be  sending  a  majority  of  representatives  to 
the  Imperial  Parliament  ;  and  the  logical  outcome  of 
Adam  Smith's  scheme  would  be  that  the  representatives 
of  the  United  Kingdom  would  form  less  than  10  per  cent 
of  the  whole. 


COLONIES  AND  DEPENDENCIES  519 

If  federation  of  this  "  thorough "  kind  does  not  seem 
possible,  any  reversion  to  the  old  methods  of  monopoly  of 
trade  and  preferential  duties  seems  equally  unlikely  to 
increase  the  economic  advantages  of  empire  to  the  mother 
country. 

The  method  of  estimating  the  advantages  and  privileges 
of  empire  in  terms  of  money  is,  however,  altogether 
inapplicable  and  fallacious.  If  Britain  had  parted  with 
all  the  territory  that  did  not  "  pay,"  she  would  not  have 
retained  in  her  empire  a  single  colony  or  dependency,  and 
even  Ireland  would  have  been  cast  adrift;  and  if  the 
British  colonies  had  forsaken  their  allegiance  because 
they  had  no  share  in  the  British  Parliament,  equally,  also, 
the  empire  would  have  disappeared.  The  empire  has 
grown  in  strength  because  liberty  and  natural  affection 
have  been  allowed  to  displace  narrow  economic  interests. 
Consider  the  question  of  defence.  Every  year  of  peace 
and  control  strengthens  the  affection  to  the  empire  of  the 
colonies,  and  makes  it  more  and  more  impossible  for  any 
other  power  to  take  our  inheritance.  And  in  case  the 
independence  of  the  mother  country  were  threatened,  the 
resources  of  the  whole  empire  would  form  a  last  reserve, 
all  the  stronger  because  it  rested  not  on  formal  treaties  or 
fixed  contributions  or  shares  in  control,  but  upon  gratitude 
and  affection.  Consider  even  the  question  of  commerce. 
It  is  easy  to  say  that  free  trade  within  the  empire  is  desir- 
able, and  it  is  to  be  hoped  that  in  the  course  of  time  this 
ideal  will  be  realised.  But  this  country  would  not  gain 
if  this  ideal  must  be  purchased  by  sacrificing  a  trade  of 
threefold  magnitude  with  foreign  countries,  by  creating  all 
kinds  of  local  jealousies  throughout  the    empire,  and  by 


520 


ELEMENTS   OF   POLITICAL   ECONOMY 


interfering  with  systems  of  taxation  which  the  people  who 
bear  the  taxes  regard  as  beneficial  or,  at  any  rate,  satis- 
factory. 

Instead  of  seeking  to  "  tighten  ties,"  the  ideal  should  be 
to  enlarge  the  sympathies  ;  and  instead  of  trying  to  barter 
government  for  revenues,  the  people  of  this  country  should 
endeavour  more  and  more  to  govern  by  consent.^ 

1  This  chapter  is  abbreviated  from  Principles,  Book  V,  Chap.  XIX  —  the 
greater  part  of  the  more  controversial  matter  being  omitted.  See  Wealth 
of  Nations,  Book  IV,  Chap.  VII ;  Davidson,  Commercial  Federation  and 
Colonial  Trade  Policy  ;  Chiozza,  i^'ree  Trade  and  the  Zoll-Verein ;  Bas- 
table,  Commerce  of  Nations,  Chaps.  X,  XVII.  The  article  on  "Colonies," 
in  Palgrave's  Dictionary,  gives  a  useful  bibliography  and  r6sum6.  See 
also  Lewis,  Government  of  Dependencies  (ed.  Lucas),  Introd.,  pp.  xliv- 
Ixii,  and  Chaps.  VI-IX.  Caldecott,  English  Colonisation  and  Empire, 
Chaps.  VII,  Vlll. 


INDEX 


Ability  as  basis  of  taxation,  434, 
i'M  seq. 

Abstinence,  81,  84,  profits  as  reward 
for,  174. 

Abstract  method,  13  seg'.,  29,  68  seq., 
234  seq.,  2(11-8,  27:3-6,  327,  329  seq., 
353  ;  Rogers's  treatment  of,  381,  392, 
395. 

Accumulation  :  influence  on  natural 
conditions,  (i,  87  seq.;  the  effect  of 
contracts,  138  ;  trade  unions  may 
restrict,  192. 

Adjustment  :  (a)  of  supply  to  de- 
mand, 225  ;  (6)  of  relative  prices 
to  relative  values,  215,  281  seq., 
324. 

Advantages  :  of  cheapness,  28,  372-3  ; 
of  division  of  labour,  48-9 ;  of 
localisation,  51-2  ;  of  production  on 
a  large  scale,  56  ;  of  joint-stock 
companies,  60  ;  relative,  of  large 
and  small  farming,  64 ;  of  exchange, 
212 ;  of  foreign  trade,  356-8 ;  relative, 
of  different  employments  of  capital, 
362-3,  489. 

Agents  of  production,  11-2,  34  seq. 

Agricultural  :  labourers,  immigra- 
tion into  towns,  54-5  ;  land,  private 
property,  112  seq.;  employment, 
proportion  of  population,  406-8, 
410-11. 

Agriculture  :  law  of  diminishing  re- 
turn in,  68  seq. ;  law  of  increasing 
return  in,  74. 

Alternating  standard  and  bimetal- 
lism, 285. 

America  :  discovery  of,  383  ;  how 
peopled,  502. 

Amsterdam,  Bank  of,  293-4,  295. 

Analytic  method,  13,  120, 122. 

Anarchism,  124. 

Anderson  and  Macpherson,  14. 

Annual  supply  of  gold,  its  influence 
on  prices,  2.56,  265-8. 


Appreciation  of  gold,  9,  256 ;  and  the 
rate  of  interest,  325 ;  and  economic 
progress,  382-3. 

Apprenticeship,  statute  of,  140,  186. 

Appropriation :  emphasised  in  distribu- 
tion, 22,  95,  96  ;  mark  of  wealth,  21- 
2  ;  as  economic  production,  33  ;  of 
public  funds,  illegitimate,  501. 

A  priori  method,  13. 

Arbitration  in  industrial  disputes,  198. 

Ardour  of  work,  62,  64. 

Aristotle,  177. 

Arts,  use  of  gold  in,  264. 

Ashley,  W.  J.,  377  N,  394  n. 

Association  :  the  principle  of,  170,  412 ; 
defects  of  freedom  of,  419. 

Athens,  trading  loans  in,  397. 

Austin,  98. 

Authority  in  distribution,  126,  132. 

Auxiliary  capital,  48,  49,  85,  87,  jK). 

Avenel,  Vicomte  d' :  Ilistoire  Econo- 
mique,  14, 151,  395,  412  n. 

Average  i'.  normal  value,  231-2  ; 
averages,  26,  152,  171. 

Bagehot,  W.,  283 n,  303 n,  306,  307, 
308,  326  N. 

Balance  of  international  indebted- 
ness, 340  seq. 

Bank  Charter  Act  (1844),  288,  292-3, 
297,  300-2,  308. 

Banking:  its  functions,  292,  (a)  issue 
of  notes  (see  Bank-notes)  ;  (6)  de- 
posit and  discount,  292,  304-8 ;  strik- 
ing development  of,  374;  Scottish, 
note  issue  essential,  296 ;  notes  more 
stable  in  value  than  coins,  294,  and 
preferred  to  gold,  294-5 ;  connection 
of  branches  and  note  issues,  297. 

Banking  principle  v.  currency  prin- 
ciple, 299-302. 

Bank  "money,"  252,292,  304;  limits 
to  its  creation,  205-ti;  interest  on, 
316  seq. 


521 


522 


INDEX 


Bank-notes,  252;  as  tokens,  297;  may 
be  a  better  medium  and  standard 
than  coin,  293-5;  as  currency,  re- 
quire special  regulation,  296-8; 
minimum  denomination,  298-9; 
overissue,  is  it  possible  ?  299-302 ; 
methods  of  regulation,  302. 

Bank  of  Amsterdam :  see  Amsterdam. 

Bank  of  England:  the  "restriction," 
249;  accepts  gold  coins  by  weight 
only,  270 ;  its  two  departments,  292- 
3;  founded  (1694),  295;  its  early 
notes,  296 ;  regulation  of  note  issues, 
292,  297;  holds  ultimate  reserve, 
306-8. 

Bank  of  Genoa,  165-6. 

Bank  (Imperial)  of  Germany,  302. 

Bank  rate :  see  Discount,  Rate  of. 

Bank  reserves:  money  as  a  store  of 
value  for,  257 ;  internal  and  foreign 
drains,  279-81,  308,  310;  manage- 
ment of,  306-8;  and  crises,  308,  310. 

"Bank  restriction"  (1797-1823),  249, 
276,  308. 

Bankruptcy  law :  as  illustrating  right 
of  expropriation,  115, 116 ;  and  gov- 
ernmental action,  425. 

Barter:  exchange  as,  216;  simplest 
case,  217;  gives  place  to  a  money 
economy,  253;  and  prices,  264; 
theory  of  foreign  trade  in  terms  of, 
332  seq.;  all  trade  barter,  361. 

Bastable,  C.  F.,  327,  339  N,  364  n,  432, 
439 ;  446-7,  451,  496  N,  497,  510  N. 

Bastiat,  486. 

Benefit  theory:  (1)  of  taxation,  444-5 
(cf .  431)  ;  (2)  of  public  expenditure, 
499-500. 

Bentham  on  security,  116,  416. 

Bequest,  9(5,  97,  100, 103,  106-11,  127. 

Bills  of  exchange,  252,  293,  328,  344, 
348,  349,  354. 

Bimetallism,  256;  rated  and  unrated 
in  England,  259-60;  recent  break- 
down, 260 ;  essential  conditions,  284 ; 
can  the  fixed  ratio  be  maintained  in 
one  country?  284-5;  under  interna- 
tional agreement  (compensatory 
action)?  285-8;  difficulties  of  in- 
ternational, 288-90 ;  advantages 
claimed  for,  291;  present  position, 
291. 

Black  Death  (1349),  66,  155,  390. 


Boehm-Bawerk,  E.von,  45  n,  92  n,  326  n, 

404  N. 

Bonar,  Dr.  J.,  82 n. 

"  Bonus  "  system,  197. 

Bosanquet,  B.,  428  n. 

Bounties:  on  production,  50;  on  ex- 
port, 484,  485. 

Bowley,  A.  L.,  18n,  152,  171,  219n. 

Brentano,  L.,  186,  198  n. 

British :  customs  and  excise  in  the 
nineteenth  century,  473-4;  income 
tax,  482,  483;  colonies  and  depend- 
encies, 511-20. 

Budget :  family  or  workmen's,  147, 
150,  405 ;  national,  ministry  respon- 
sible for,  498. 

Building  sites,  law  of  dim.  ret.  applied 
to,  73. 

Burke,  E.,  119 N. 

Buxton,  S.,496n. 

Buyers'  monopoly,  170,  494. 

Cairnes,  J.  E.,  226*. 

Canada,  responsible  government 
granted,  553. 

Capital,  10;  a  requisite  of  production, 
12,  34 ;  analysis  of  conception,  41-4, 
83;  Mill's  four  propositions,  44-5, 
83;  auxiliary,  48,49;  mental,  ift.; 
concentration  of,  56-61, 128, 129, 138 ; 
and  large  farms,  64;  and  size  of 
farms,  65;  growth  of,  83-92;  and 
economic  basis  of  private  property, 
102-3;  exijloitation  of  labour  by, 
127  seq.;  difficulty  of  collective 
ownership,  130  seq. ;  distribution 
of,  137-8 ;  harmonies  and  conflicts  of 
labour  and,  185-98,  410-2;  rate  of 
interest  on  loanable,  311  seq.;  living, 
371 ;  exchange  essential  to,  399  (see 
also  Interest) . 

Carey,  359. 

Certainty:  in  interpretation  of  con- 
tracts, 104,  255;  in  taxation,  448;  in 
public  expenditure,  406,  510. 

Chamberlain,  J.,  516  n. 

Chance,  its  judgments  popular,  131, 
132. 

Charles  I  "borrows"  from  the  Mint, 
295. 

Charles  II  shuts  the  Exchequer,  295. 

Cheapness  and  utility,  372-3. 

Checks  to  population,  80  seq. 


INDEX 


523 


Children :  bequest  limited  in  favour  of , 
110-1;  labour  of,  134;  degraded 
labour  of,  317. 

China,  259,  308,  358,  3G7. 

Chiozza,  L.  G.,  520  n. 

Church,  medicBval,  and  freedom  of 
bequest,  108. 

Circulating  capital,  44,  89,  318. 

Clare,  G.,  303 n,  317,  319,  326 N,  355 n. 

Clark,  J.  B.,  105  n. 

Classification  of  labour,  48,  56,  64. 

Climate  a  constituent  in  national  pro- 
duction, 15,  36. 

Clootie's  croft,  in  Scotland,  470. 

Cobden,  R.,  516. 

Cohn,  G.,  451  n. 

Coinage  :  definition  and  attributes 
of  coin,  258-9  ;  systems  of  metallic, 
259-60  ;  and  Gresham's  law,  269-71 ; 
token,  259,  271-2  ;  under  bimetal- 
lism, 286;  history  of  English,  378- 
80. 

Collective  bargaining,  140. 

Collectivism,  124  seq. 

Collet,  Miss,  412  N. 

Colonies  and  dependencies,  511  seq. 

Combination  :  of  labour,  39,  47  seq. ; 
simple  and  complex,  49;  combina- 
tions, 159, 160, 161 ;  ti-ade  unions  and, 
187,  412,  419. 

Commercial  (1)  crises:  and  note 
issues,  301-2 ;  and  suspension  of  Bank 
Act,  308 ;  definition,  309 ;  causes,  309- 
10 ;  (2)  supremacy,  37 ;  (3)  treaties, 
489,  493,  514. 

Communication,  means  of;  improve- 
ments in,  71. 

Communism,  132. 

Commutation  of  services  and  pay- 
ments in  kind  into  money,  253,  254, 
374,  378,  390. 

Companies,  joint-stock,  59-61. 

Comparative :  (1)  method,  18;  (2)  cost, 
theory  of,  332  seq.,  356,  357. 

Compensation ;  for  expropriation, 
105,   lOfi-9  ;  for  improvements,  114. 

Compensatory  action  :  (1)  of  the 
double  standard,  286-8,  290  ;  (2)  of 
causes  affecting  mediaeval  prices, 
382. 

Competition  :  as  stimulus  to  produc- 
tion, 103,  104  ;  in  letting  land,  114  ; 
socialism  would  displace,  126  ;  and 


distribution ,  136, 138-9 ;  and  wages  — 
its  implications,  159;  trade  miions 
and,  187  ;  in  mediaival  and  modern 
markets,  217-8  ;  and  determination 
of  value,  225  seq.;  v.  monopoly, 
232  seq.,  246,  248  seq.;  industrial 
and  commercial,  328  seq.;  and  inter- 
est, .397 ;  diminishes  profits  of  inter- 
change, 402  ;  prices  v.  monopoly 
prices,  402  ;  in  production,  412,  418; 
in  distribution,  418-9;  stimulated  by 
free  trade,  493. 

Concentration  :  of  industry,  56-61  ;  of 
capital,  129,  138. 

Conceptions  :  economic,  continuity  in, 
11,  24,  141-2  ;  inappropriate,  368. 

Conciliation,  industrial,  methods  of, 
196  seq. 

Conflict  of  interests  between  labour 
and  capital,  185-98. 

Constant  return,  76,  77. 

Consumers'  rent,  26-9,  356,  373,  397. 

Consumption.  22,  2'dseq.;  productive 
and  unproductive,  39,  45,  314-5;  im- 
mediate, 43,  44  ;  difficulties  of 
socialism,  130-1 ;  influence  of  custom, 
141  ;  benefits  of  freedom,  418  ; 
taxes  on,  471-83. 

Consumption-capital,  35,  42-3,  84,  85, 
89-90,  138. 

Continuity:  see  Conceptions. 

Contract :  movement  fi'om  status  to, 
96,  127,  211 ;  freedom  of,  as  basis  of 
property,  103-4  ;  hostility  of  social- 
ists to,  126-7 ;  security  essential,  51, 
104  ;  certainty  in  interpretation, 
255  ;  progress  and  freedom  of,  374-5 ; 
enforcement  of,  a  function  of  govern- 
ment, 421-23  ;  and  incidence  of  taxa- 
tion, 454,  455  seq. 

Convertibility  of  bank-notes,  what  it 
implies,  300. 

Cooijeration,  simple  and  complex,  49; 
in  farming,  64;  not  socialism,  124; 
in  trade  and  production,  197. 

Corn  as  standard  of  value,  215. 

Corn  Laws,  repeal  of,  388,  394,  474. 

"  Correcting  "  the  exchanges,  354. 

Cossa,  L.,  18  N. 

Cost  of  labour,  38,  134,  185. 

Cost  of  production,  85, 86 ;  rent  in  rela- 
tion to,  200  seq.,  241-3;  and  quasi- 
rent,  243-5;    in  relation   to  value, 


524 


INDEX 


231-40;  of  persons,  as  a  measure 
of  progress,  371,  372 ;  real  cost  aud 
cheapness,  373. 

Cottier  rents  in  Ireland,  390. 

Counteracting  causes:  to  large  scale 
production,  57-9;  to  law  of  dim. 
ret.,  71-3;  to  concentration  of  capi- 
tal, 129-30,  138. 

Cournot,  A.,  245,  327. 

Craft  gilds,  52,  186-7. 

Credit:  its  extension  increases  wealth, 
86-7 ;  effect  on  general  prices,  266, 
278  seq. ;  gold  basis  limits  inflation, 
279-82,  302,  305;  and  rate  of  dis- 
count, 317;  and  foreign  exchanges, 
349  (see  also  Bank  Money). 

Criminal  law  as  method  of  govern- 
ment interference,  420-1. 

Crisis :  see  Commercial  crises. 

Crofters,  Scottish,  63. 

Cimningham,  W.,  2,  55 N,  377  N,  382, 
394  N,  404  N,  412  N. 

Currency  principle,  299,  301-2  (cf. 
Bank  Charter  Act). 

Currency,  systems  of  metallic,  259-60, 
269  (see  also  Banking,  Coinage). 

Curves,  their  use  in  economics,  24,  45. 

Custom  and  law,  96;  as  determining 
distribution  of  (a)  agents  of  produc- 
tion, 136-9,  (6)  incomes,  140-1,  376; 
influence  on  wages,  159, 161, 163 ;  and 
rents,  388-91 ;  and  incidence  of  taxa- 
tion, 454-5. 

Customs  duties:  origin  of,  472;  Brit^ 
ish,  in  the  nineteenth  century,  472-4. 

Darwin  and  Malthus,  79. 
Davidson,  J.,  165 n,  514n,  520n. 
Debasement  of  currency,  255. 
Debt :  law  of,  396 ;  public,  515. 
Deductive  method,  14,  68  seq.,  234-8, 

261-8,  273-6,  327,  329  seq.,  391-3. 
Deferred    payments,    standard     for, 

2.54  seq. 
Definitions :  use  of,  in  economics,  8-10 ; 

rules  for,  10-13,  122. 
Degradation  of  labour,  6,  55, 134, 195. 
Demand:  utility  the  root  of,  22;  for 

commodities,  is  it  demand  for  hibour? 

44,  84-5;  consumption  governs,  140; 

effects  of   increase   of,   50,  76;    as 

directing   industry   and    growth   of 

capital,  84;  socialism  in  relation  to. 


126-30;  and  production  in  large 
scale,  130 ;  law  of,  220-2 ;  elasticity, 
189, 221-2 ;  direct,  joint,  and  derived, 
170,  222 ;  changes  in,  170,  222-4,  244, 
249;  effect  on  price,  («)  immediate, 
227,230;  (6)  ulterior,  228;  and  mo- 
nopoly, 245  seq.;  and  overproduc- 
tion, 216-7. 

Demand  and  supply :  of  labour  in  dif- 
ferent employments,  167 ;  of  capital, 
175;  reciprocal,  216;  in  a  market  — 
analysis,  217-9;  equation  of,  225565.; 
and  normal  value,  231,  239;  as  deter- 
mining value  of  gold,  256,  266,  283 ; 
of  loanable  capital,  312-6;  of  loan- 
able "money,"  317-20;  dependence 
of  profits  on,  401. 

Deposit  and  discount,  banks  of:  see 
Banking. 

Depreciation :  of  the  standard,  255 ;  of 
coinage,  259;  of  inconvertible  paper, 
213,  263,  273-6 ;  evils  of,  276-7 ;  and 
the  rate  of  interest,  324-5;  and  the 
exchanges,  350;  indirect  effects  on 
foreign  trade,  277  n,  351-2 ;  in  weight 
of  coins,  379;  does  it  imply  deprecia- 
tion in  value  ?  380-82. 

Dictionary  of  Political  Economrj:  see 
Palgrave. 

Difficulty  of  attainment  and  value, 
219. 

Diminishing :  (1)  return,  law  of,  6,  68- 
74, 76-7,  91 ;  in  relation  to  value,  228, 
239;  in  case  of  gold,  265;  and  inter- 
national values,  337 ;  and  incidence 
of  taxes,  474-6,  477 ;  (2)  utility,  law 
of,  25,  26,  27. 

Disadvantages  of  division  of  labour, 
52-5. 

Discount,  rate  of:  bank  and  market 
rates,  320;  causes  affecting;  316-20; 
differences  from  interest,  316,  320; 
their  reciprocal  action,  321-2;  bank 
rate  and  the  exchanges,  348-9. 

Disintegration  of  family  a  feature  of 
economic  progress,  107-8. 

Distribution :  appropriation  important 
in,  22,  95 ;  value  and,  22 ;  population 
and,  80;  and  growth  of  capital,  84, 
88 ;  popular  and  economic  senses,  95 ; 
problems  in,  95-6;  and  exchange, 
9f)-7,  211 ;  influenced  by  laws  of  in- 
heritance and  bequest,  106 ;  socialis- 


INDEX 


525 


tic  schemes,  120  se^".;  their  difficulty, 
132 ;  quantitative,  of  property,  1:3(5-9 ; 
of  income,  139  seg.,'  three  problems, 
141 ;  progress  in,  375-7 ;  benefits  and 
defects  of  freedom  of,  418;  the  inci- 
dence of  taxation  a  problem  of,  454. 

Disutility,  23,  25,  27, 37-9, 46 ;  economic 
progress  in  terms  of,  372-4 ;  of  taxa- 
tion, 437  seq.,  437  N. 

Division  of  labour,  47-55;  meaning  of, 
47 ;  involves  division  of  capital,  47, 
48, 49 ;  advantages,  48,  74-5 ;  limited 
by  extent  of  market,  50,  211,  357; 
disadvantages,  52-5. 

Documentary  reserve,  300,  302. 

Do  well,  S.,  49()N. 

Dunbar,  C.  F.,  303n. 

Durability  of  gold,  as  affecting  its 
value,  25(),  258,  2(56  seq. 

Duration  of  power  to  labour,  39. 

Dynamical  forms  of  laws  of  diminish- 
ing and  increasing  return,  71-3,  75. 

Earning  capacity,  as  measure  of  prog- 
ress, 371. 

Earnings,  annual  v.  wages,  191,  194; 
partly  quasi-vent,  140 ;  opportunities 
for  extra,  147. 

Economic:  basis  of  private  property, 
100-5,  112  seq.;  conceptions,  11,  24; 
principle  of  distribution,  375;  his- 
tory, 2,  7,  139;  ideas,  distinguished 
from  legal  and  ethical,  106 ;  litera- 
ture, 1-3;  laws,  15-7,  140,  408; 
methods,  13-5;  rent,  10,  199-207, 
241-3,  391-2 ;  studies,  difficulties  of, 
17-8 ;  theories,  history  of,  2-3, 32,  35 ; 
utilities,  32-4,  117,  13*9,  142. 

Economics,  need  of  specialisation, 
4-5,7. 

Economies,  interna?  and  ex^er^a?,  51-2, 
57,  74. 

Economy :  of  high  wages,  39,  102,  196 ; 
as  a  canon  of  taxation,  449;  and  ex- 
penditure, 507-9. 

Eden,  Sir  F.  M.,  14,  412  n. 

Edgeworth,  F.  Y.,  31  n,  327,  339 N, 
459  N. 

Education :  cost  as  an  element  in 
quantity  of  labour,  38;  as  affect- 
ing efficiency,  39,  40;  free,  is  it 
socialistic?  125;  cost  as  measuring 
progress,  371. 


Efficiency :  (a)  of  labour,  36,  39-40,  45, 
56,  85-6;  affected  by  distribution, 
88;  and  quantity  of  labour,  148;  and 
a  minimum  wage,  194-5,  19<5;  and 
competition,  418;  and  expenditure, 
.507-8;   (&)  of  money,  264. 

Elasticity:  of  demand  and  supply, 
221-2,  225,  229;  and  incidence  of 
taxes,  45(5-9. 

Elizabeth,  379,  411. 

Ely,  R.  T.,  135  N. 

Emphasis,  adjustment  of,  148. 

Empire :  the  burden  of,  515 ;  its  rela- 
tion to  trade,  516-8 ;  its  real  advan- 
tages, 520. 

Employment,  regularity  of,  146,  167. 

Enclosures,  63,  121. 

Encyclopxdia  Britannica,  240 n. 

Endowments,  limits  to  freedom  of 
bequest,  110. 

Engel's  law,  147. 

England :  material  progress,  26 ;  prog- 
ress of  cities,  55;  landlord  and  ten- 
ant system,  114;  reform  as  regards 
property,  121;  distribution  of  land, 
137;  wages  in,  151-2;  early  factory 
system,  373 ;  progress  in  distribu- 
tion, 376;  monetary  history,  378-80; 
history  of  prices,  380  seq.;  progress 
and  agricultural  rents,  389-91 ;  and 
interest,  394;  and  occupations  and 
wages,  396-8;  of  expenditure,  498; 
colonial  policy,  511  seq. 

English:  silver  coinage  before  1796, 
269;  gold  coinage  before  1891,  270. 

Entrepreneur,  the,  193. 

Environment,  as  affecting  quantity  o£ 
labour,  38. 

Equality :  of  taxation,  13,  434-47 ;  be- 
fore the  law,  374 ;  of  public  expendi- 
ture, 502. 

Equation :  see  Demand  and  supply. 

Etahm  hoiteux,  284  (cf.  260). 

Ethics  and  political  economy,  7,  18, 
106,  109. 

Evasion  of  taxes,  430, 446, 453, 465, 501. 

Evolution:  socialist  doctrine,  128; 
economic  progress  and  the  theory 
of,  368,  377  N. 

Exchange:  value  important  in,  22;  a 
kind  of  production,  33,  95,  374;  con- 
nection with  division  of  labour,  50; 
and   distribution,    96-7  ;    socialism 


526 


INDEX 


would  abolish,  126 ;  relation  to  pro- 
duction and  distribution,  211 ;  real 
advantage,  212 ;  as  barter,  216-7 ; 
Book  III,  passim,  373 ;  progress  in, 
374-5 ;  and  profits,  399  (see  also 
Contract). 

Exchange  value :  see  Value. 

Exchanges:   see  Foreign  exchanges. 

Excise  duties:  history  in  England, 
472 ;  British,  in  nineteenth  century, 
473 ;  incidence  of,  474-6. 

Expectation,  117-8. 

Expenditure,  public:  adjustment  for 
social  ends,  446-7  (cf.  304-5) ;  its 
character,  comparison  with  taxa- 
tion, 497  seq.;  principles  of,  502-10. 

Expenses  of  production,  193,  201,  233 
seq.,  240 N. 

Exploitation  of  labour,  127  seq. 

Export,  new,  its  effect  on  foreign 
trade,  353. 

Exports:  pay  for  imports,  340  seq.; 
"invisible,"  342-3,  354,  .356-7;  inci- 
dence of  duties  on,  478-80. 

Expropriation,  the  right  of,  114-5; 
compensation  for,  116-9. 

Extent  of  market,  division  of  labour 
limited  by,  50-1. 

F's,  the  three,  115. 

Factor  of  production,  conditions  for  a 

rise  in  price,  188-9. 
Factory  acts :  are  they  socialistic  ?  125, 

133 ;  socialists  promoted,  134. 
Factory  system  and  evils  of  division 

of  labour,  53,  373. 
Faculty  theory  :  of  taxation,  437,  440- 

2  ;  of  expenditure,  504. 
Family,  the  ancient  unit  of  society, 

107. 
Family  budgets,  147,  150. 
Farming,  large  and  small,  62-67. 
Federation,  imperial,  518-20. 
Feudalism,  120,  121,  383. 
Field,  J.  D.,  144  N. 
Fifteenth  century  in  England,  406. 
Final  utility,  23,  24  seq.,  27  (see  also 

Marginal). 
Finance,  public :  see  Expenditure,  Tax- 
ation. 
Fixed  capital,  44,  90,  138,  .399,  400  N. 
Fixed  ratio:  see  Bimetallism. 
Flint,  R.,  122,  135  N,  367,  377  N. 


Food  supply  and  eflficiency,  39;  and 
population  79  seq. 

Foreign  :  (1)  coins,  in  England,  259, 
378,  379 ;  (2)  drain  of  gold,  its  effect 
on  general  prices,  279. 

Foreign  exchanges,  327,  340-55;  ele- 
ments of  international  indebtedness, 
340-43  ;  media  of  settlement,  343-5; 
real  par  v.  mint  or  nominal  par,  340, 
345;  rise  and  fall,  346;  gold  points, 
346;  favourable  and  unfavourable, 
347-8 ;  and  the  bank  rate,  348 ;  state 
of  credit,  349;  arbitrage,  349;  state 
of  currencies,  350. 

Foreign  trade  :  fallacious  measure  of 
advantage,  9-10  ;  and  division  of 
labour,  50;  reciprocal  demand  in, 
216;  its  proximate  cause,  difference 
in  price,  282;  the  theory,  327-39; 
comparative  immobility  of  labour 
and  capital,  328-32  ;  effects  of  (1) 
depreciation  and  appreciation  of  the 
currency,  351-2;  (2)  changes  in  bal- 
ance of  trade,  (a)  new  export,  353-4 
(6)  tribute,  ih. ;  theory  of  compara- 
tive cost,  332-6;  theory  of  interna- 
tional values,  336  seq.;  money  in 
international  trade,  338-9;  modify- 
ing influences,  337-8;  real  advan- 
tages, 356-8 ;  possible  disadvantages, 
to  a  particular  country,  358-64  (cf. 
490-4) ;  has  made  agricultural  land 
free,  391. 

Formal  justice:  see  Justice. 

Fourier,  121,  124,  158. 

Fox,  Wilson,  412  n. 

Foxwell,  H.  S.,  105  n,  124,  135  n. 

France,  2;  population,  16,  78;  growth 
of  small  industries,  58;  speculative 
manias,  59  ;  peasant  proprietors, 
64-5,  66;  distribution  of  land,  137; 
wages  in,  151,  153  ;  limitation  of 
overvalued  silver,  260  ;  banking 
and  note  issues,  297  ;  commercial 
treaty  with,  493. 

Freedom  :  and  efificiency  of  labour, 
40  ;  V.  organisation,  130-3  ;  its  es- 
sence, 420  ;  limited  by  government 
interference,  427-8. 

Free  trade  :  and  division  of  labour, 
48  ;  in  early  markets,  217  ;  a  prob- 
lem in  foreign  trade,  327  ;  lessens 
economic    superiority  of    landlord, 


1 


INDEX 


527 


391 ;  V.  protection,  484-96  ;  meaning 
of,  484  ;  as  eiYecting,  (a)  the  con- 
sumer, 485 ;  (b)  home  industries,  480 ; 
assumptions  of  the  arf:;ument  for, 
487-90;  theoretical  exceptions  to, 
490-94  (cf.  358-64);  negative  argu- 
ment for,  494-6. 

French  Revohition,  123. 

Functions  of  government :  see  Govern- 
ment. 

"  Futures,"  dealings  in,  218. 

Gairdner,  Dr.  Charles,  304. 

General :  (1)  prices,  movements  in, 
213,  216;  (a)  causes,  255-6,  261-83; 
(h)  measurement,  213-4,  256-7;  and 
relative  prices,  150,  215;  progress 
and,  380-83;  (2)  profits,  183-4; 
(3)  wages,  149-65. 

Geographical  position  of  country,  36-7. 

Geological  character  of  country,  36. 

George  II,  398. 

George,  Henry,  388. 

Germany,  2;  restraint  of  speculation, 
218;  gold  standard,  286,  289,  308; 
taxation,  482 ;  ZoU-Verein,  495. 

Giffen,  Sir  R.,  43,  92  n,  327  n,  371. 

Gift  inter  vivos,  111,  453. 

Gilbart,  J.  W.,  303n. 

Gilds :  see  Craft  Gilds. 

Gilmann,  189  n. 

Gladstone,  W.  E.,  Ill,  362,  440,  474, 
496  N,  497. 

Godwin,  98,  124. 

Gold :  appreciation  of,  9 ;  price  and 
value,  213,  265,  281;  sole  standard  in 
England,  260,  380;  its  origin,  285, 
289;  causes  determining  its  value, 
255-6,  261-83 ;  cost  and  value,  265-8; 
and  silver  —  relative  values,  267-8, 
284-5;  value  of,  in  terms  of  demand 
and  supply,  256,  266,  283 ;  and  silver 
prices,  interaction,  283  n;  distribu- 
tion throughout  world,  339,  354-5; 
currency  in  England— history,  378- 
80. 

Goldsmiths'  notes,  295. 

Gomme,  G.  L.,469. 

Gonner,  E.  C.  K.,  135  n. 

Goschen,  G.  J.,  290,  347,  355  n,  507. 

Government:  (1)  economic  functions, 
415-8 ;  (2)  interference,  socialism 
and,  126, 130-3;  methods, 420;  («)  of 


legal  enactment,  420-23 ;  (b)  of  gov- 
ernmental action,  42;i-5 ;  limitations, 
420,  423,  425-8;  (3)  expenses  and 
revenues,  429-509  (see  Expenditure, 
Taxation). 

Grain  rents,  215,  254. 

Grants  in  aid,  509. 

Graphs :  see  Curves. 

Great  Britain:  see  United  Kingdom. 

Gresham's  law,  15-6,  269-71,  274,  285, 
380. 

Gross,  Dr.,  192 n. 

Ground  rents,  315 ;  taxation  of,  442-4. 

Gudeman's  field,  in  Scotland,  470. 

Habit    may    counteract    Gresham's 

law,  270. 
Hadley,  A.  T.,  76 N,  164,  173 N,  184  n, 

198  N,  207  N. 
Harmony  of  interests  of  labourer  and 

employer,  185,  196. 
Henderson,  470 N. 
Henry  VIII,  382. 
Higgling  of  the  market,  225, 
Higgs,  H.,  45  N. 
Historical  method,  3,  18,  99,  120,  128- 

30,  292  seg.,  305  se^.,  429. 
History,  economic,  51,  120,  1.38. 
Hoarding,  84,  257,  200,  264,  290. 
Hobson,  J.  A.,  55  n,  61  n,  173 n,  251  n. 
Holland,  293. 

Holyoake,  G.  J.,  135  n,  198 n. 
House  rent,  incidence  of  taxes  on,  452. 
Human  element  in  economics,  134. 
Hypothetical  method,  13,  14,  15,  69, 

261  seq. 

Ideals,  conflict  of,  133,  136 ;  benefits 
of  socialist,  134. 

Immaterial:  production,  33-4,  50; 
localisation  of,  52 ;  on  a  large  scale, 
56,  57;  capital,  W;  wealth,  132. 

Immigration :  to  the  towns,  547 ;  to 
new  countries,  bounties  on,  74. 

Immobility,  comparative,  of  labour 
and  capital  between  nations,  328-32. 

Imperial  federation,  518-20. 

Imports,  their  payment  by  exports, 
216,  .3:«,  339,  340,  ;U2,  356-7,  488. 

Improvements  in  production,  distribu- 
tion of  effects,  194  (see  also  Rent). 

Improver,  should  owner  be?  113. 

Incidence  of  taxes :  see  Taxation. 


528 


INDEX 


Income:  and  capital,  43,  83;  distribu- 
tion of,  96,  139  seq. ;  taxation  and 
free  minimum,  437-8. 

Income  tax:  British  assessments,  88; 
law,  400  n;  its  history  and  fiscal 
reform,  473-4. 

Inconvertible  notes:  as  money,  255; 
low  denomination,  298;  depreci- 
ation, 213,  249,  255,  262;  as  illus- 
trating quantity  theory,  27."5-(5. 

Increasing  return,  law  of,  74  seq. ;  re- 
lation to  value,  228-9,  239;  in  case 
of  monopoly,  247;  and  international 
values,  337-8;  and  taxation,  442, 
474-5. 

Increments:  marginal,  74;  unearned, 
10,  119  N,  442-4,  467-8. 

Index  numbers,  213,  214,  216,  219,  257. 

India :  village  communities,  112 ;  sil- 
ver currency,  260 ;  monetary  strin- 
gency, 290;  British  government, 
513-4,  518. 

Indirect  taxes,  452,  453  seq. 

Individual :  sometimes  useful  to  begin 
with,  6-7 ;  transition  to  group  or 
nation,  25-6. 

Individualism:  socialism  and,  123 
seq. ;  and  inequalities  in  income, 
416;  its  benefits  and  defects,  418-20. 

Inductive  method,  14, 15, 16,  56,  58,  80. 

Industrial :  revolution,  the,  56,  75, 1S(] ; 
partnership,  124, 197;  domain  of  the 
state,  433. 

Industry:  localisation  of,  51-2;  con- 
centration of,  56-9,  129-30. 

Inequalities:  in  distribution  of  wealth, 
127  seg.,  138 ;  in  income,  416  (see  also 
Taxation). 

Inflation  of  prices:  see  Credit. 

Inheritance  and  bequest,  96, 104, 106-9, 
126,  137. 

Lisurance  against  risk,  193,  396,  398, 
402-3;  income  tax  exemptions  on 
ground  of,  4.38,  440. 

Intensity  of  labour,  38. 

Intensive  and  extensive  cultivation, 
68  seq. 

Interaction  of  gold  and  silver  prices, 
283  N. 

Interdependence  of  production,  distri- 
bution, and  exchange,  141. 

Interest:  capital  as  yielding,  41; 
effects  on  accumulation,  88-9,  90; 


received  on  all  kinds  of  capital, 
113;  pure,  193;  loan  and  profit, 
175-8, 193 ;  on  "  money  "  and  on  capi- 
tal, 311-2;  causes  affecting  rate  on 
loanable  capital,  312-6 ;  more  steady 
than  discount,  and  why,  316,  320-4; 
connection  with  exchange  value  of 
money,  324-5 ;  progress  and  rate  of, 
396-8. 

Interests  :  see  Conflict,  Harmony. 

International:  bimetallism,  285  seq.; 
indebtedness,  259,  340-3;  trade  and 
values  —  pure  theory,  327-39. 

Intestacy,  108  seq. 

Intrinsic  value,  212. 

Invention :  through  division  of  labour, 
49 ;  taxation  and,  431. 

Investment,  facilities  for,  88,  313  seq. 

"  Invisible  exports,"  342. 

Ireland:  cooperative  farming,  64 ;  ju- 
dicial rents,  96;  Mill  influenced  by, 
113 ;  distribution  of  land,  137 ;  wages 
(1848-51),  156. 

"  Iron  Law  "  of  wages,  127-9. 

Italy,  2 ;  finance  banks,  295. 

"Jack's  land,"  469. 

Japan, 308. 

Jevons,  S.,  29 N,  45n,  258,  260,  293, 302, 
303  N,  326  N. 

Johnston,  Dr.,  on  primogeniture,  111. 

Joint:  demand,  222;  cost,  239. 

Joint-stock:  companies, 59-61 ;  banks, 
298. 

Judicial,  rents  and  wages,  56. 

Jurisprudence :  Adam  Smith's  treat- 
ment of,  3;  a  social  science,  6;  and 
economics,  18. 

Justice:  not  to  be  bought  or  sold, 
374 ;  the  principle  of  formal,  a  limita- 
tion to  governmental  action,  447  ; 
in  public  expenditure,  447,  505-6. 

Kantian,  imperative,  505. 
Kay,  Joseph,  67  n. 
Keynes,  Dr.,  18 N. 

Kind  of  produce,  and  scale  of  farming, 
66. 

Labour:  and  capital  9,  and  prices, 
10;  economic  use  of  term,  11;  is  it 
essential  to  wealth  ?  21-2 ;  as  agent 
of    production,    11,   34,   37-40;     (1) 


INDEX 


529 


subjective,  elements  of  "quantity 
of  labour,"  37-9,  45-«;  disutility 
exaggerated,  i;52;  ('_>)  objective, 
causes  afifecting  efficiency,  3!M0; 
division  of,  47-55;  economy  of,  48, 
56,  64;  wide  interpretation,  40,  1130, 
141,  149;  condition  of  and  size  of 
farms,  66;  as  basis  of  private 
property,  100-2;  exploitation  of, 
127 ;  distribution  of  ownership,  138- 
9;  manual  and  professional,  149, 
185;  and  capital,  harmonies  and 
confiiets  of,  185-98;  as  standard  of 
value,  214;  in  relation  to  disutility, 
372-4;  progress  and  prices  of  dif- 
ferent kinds,  405-110,  increasing 
differentiation,  406;  migration  from 
country  to  town,  406-8;  relations  of 
capital  and,  410-12. 

Lai  s^er-f aire,  134-5. 

Land:  as  agent  of  production,  11-12, 
34,  35-7 ;  advantages  of  large  farms 
as  regards,  64;  private  property  in, 
112-4,  118;  distribution  of,  137; 
taxes  on  rent  of,  461  seq.;  owner- 
ship, reform  of  abuses,  468-70. 

Land  and  stock  lease,  66. 

Land  laws,  economic  effects,  ^,  f)7. 

Landlord  and  tenant  system,  its  ad- 
vantages, 113-4;  his  advantages  in 
bargaining,  388-91. 

Land  values,  taxation  of,  464-9. 

Latin  Union,  286  (cf.  260). 

Law:  (1)  of  constant  return,  76,  77; 
(2)  of  diminishing  return,  65,  68-74, 
474-6,  477 ;  (3)  of  diminishing  utility, 
25,  26,  27;  (4)  of  increasing  return, 
74  seq.,  442,  474-5;  (5)  of  substitu- 
tion, 55,  90,  160,  238,  384-6,  412,  474, 
501,509-10;  (6)  Engel's,  147;  Gres- 
ham's  1&-6,  269-71,  274,  285. 

Law  and  custom,  influence  of,  in  dis- 
tribution, 137-41 ;  on  wages,  159, 
161-2,  163;  on  interest,  314;  on  rent, 
385^91,  and  incidence  of  taxation, 
454-5. 

Law,  John,  279,  292,  293,  309. 

Law  of  settlement,  411. 

Laws  of  production  and  distribution, 
97  seq. 

Lease,  land  and  stock,  66. 

Legal :  aspects  of  inheritance  and  be- 
quest, 106;  enactment,  methods  of, 

2m 


420-23;  fictions,  and  administration 
of  criminal  law,  421;  ratio  of  gold 
and  silver,  284  seq.;  tender,  259-60, 
272,  284. 

Leroy  Beaulieu,  58-9,  78. 

Leslie,  ClifTe,  481  n. 

Lewis,  Sir  G.  C.,520n. 

Liabilitj-,  limited,  the  principle  of,  60, 
397. 

Liberty :  see  Freedom,  Natural  liberty. 

Licences,  in  trade,  472-473. 

Limitation  (1)  of  issues,  principle  of, 
271,  272,  275;  (2)  of  supply  of 
labour,  189. 

Limited  liability,  60,  397. 

Limits:  (1)  to  production,  68  seq.,  91; 
(2)  to  growth  of  capital,  85  seq. 

Limping  standard,  260,  284. 

List,  F.,  34,  364,  365  N,  493,  496  N. 

Loan  interest :  see  Interest. 

Loanable  capital :  see  Capital. 

Localisation  of  industry,  51-2,  57,  76, 
357. 

Local  taxation:  special  rates  uneco- 
nomical, 431 ;  in  Middle  Ages,  440; 
the  "benefit"  theory  applicable, 
445;  municipal  trading  for  relief  of 
rates  regressive,  499;  and  the  prin- 
ciple of  foi'mal  justice,  506. 

Locke,  John,  100. 

Macaulay,  255. 

McCullock,  J.  R.,  1,  436. 

Machinery  :  division  of  labour  and, 
48;  effects  of,  on  wages,  172-3. 

Macpherson,  Annals  of  Commerce,  14. 

Macrosty,  H.  W.,  61  n",  135  n. 

Maine,  SirH.  S.,99,105n,  107,  111  N,422. 

Maitland :  see  Pollock  and  Maitland. 

Malagrowther,  Sir  Malachi  (Sir  Wal- 
ter Scott),  298. 

Malthers,  16,  78-82,  91,  165  n. 

Management  :  joint-stock,  59-60 ; 
wages  of,  153,  174,  175,  180-1,  191, 
193,  396,  398,  402,  410. 

Manorial  system,  389-90. 

Manufactures:  production  on  large 
and  small  scale,  57-01 ;  law  of  in- 
creasing return  in,  75. 

Marginal:  cost,  72,  265;  doses,  72;  in- 
crements, 74 ;  labourer,  172 ;  return, 
71 ;  utility,  23,  24  seq.,  71,  170,  223, 
372,  503. 


530 


INDEX 


Market:  extent  of,  limits  division  of 
labour,  50-1,  130 ;  equality  of  prices 
in  same,  226;  value,  225  seq. 

Markets,  development  and  character- 
istics of,  217-9. 

Marshall,  A.,  29 n,  30,  31  n,  45  n,  55 n, 
61 N,  67 N,  74,  87,  90,  92 N,  114 N,  149, 
160,  161,  165  N,  221,  222,  225,  231,  238, 
240  N,  243,  244,  245,  251 N,  392,  399, 
403  N. 

Marx,  Karl,  124,  127,  135 n. 

Materialisation  of  wealth,  6. 

Mathematical  method,  13  seq.,  18. 

Maximum  utility,  as  an  economic 
ideal,  416-8. 

Medieval :  idea  of  progress,  367 ;  prices 
(relative),  384  seq. ;  taxation,  472. 

Medium  of  exchange,  11,  253,  264,  272, 
293. 

Menger,  A.,  105  n,  1.35 n. 

Mental:  capital,  49;  evils  of  division 
of  labour,  53-5. 

Mercantile:  (1)  law,  development  of, 
421-22 ;  (2)  system,  479,  491. 

Merchandise,  currency  as,  259. 

Methods  of  political  economy,  13-15 
{see  Comparative,  Deductive,  In- 
ductive, Historical,  Mathematical). 

Middle  Ages:  break  up  of  economic 
system,  52;  serfs  of,  55  (see  also 
Mediaeval) . 

Migration:  from  monopolistic  towns, 
53;  from  country  to  town,  406-8. 

Mill,  J.  S.  :  what  is  wealth,  21,  22  ; 
meaning  of  productive  and  unpro- 
ductive, 32  ;  circulating  and  fixed 
capital,  44 ;  four  proiDositions  on  cap- 
ital, 44-5,  83,  84  ;  combination  of 
labour,  47,  64  ;  law  of  diminishing 
return,  69,  71,  72  ;  dread  of  over- 
population, 78,  91,  116  ;  desire  of 
accumulation,  87  ;  limits  to  produc- 
tion, 91  ;  laws  of  pi'oduction  and 
distribution,97-8, 99, 120  ;  economic 
bases  of  private  property,  100  seq. ; 
on  inheritance,  109,  446  ;  bequest, 
107,  111  ;  property  in  land,  112-3, 
114  ;  pretium  affectionis,  116  ;  pre- 
scription, 118;  socialism  and  dsprit 
de  corps,  131  ;  authority  in  distri- 
bution, 132,  144  N  ;  wages  fund  the- 
ory, 1.54  spq.,  165  n;  supplementary 
wages,  170  ;  meaning  of  value,  213, 


214  :  equation  of  demand  and  sup- 
ply, 225  ;  same  price  in  same 
market,  226  ;  identifies  natural  and 
average  value,  231,  240  n  ;  efficiency 
of  money,  263,  264;  cost  and  value 
of  gold,  268  n;  commercial  crisis, 
309,  310  N  ;  international  values,  327, 
336 ;  new  export,  353 ;  his  Book  IV, 
377  N  ;  increase  of  rent  an  evil,  388; 
progress  and  distribution,  395;  prof- 
its and  prices,  399, 400, 401 ;  probable 
future  of  labouring  classes,  411-412 ; 
democratic  despotism,  428 ;  equality 
of  taxation,  437 ;  "  protection  "  basis 
of  taxation,  444 ;  direct  and  indirect 
taxes,  452. 

Minimum:  (1)  wages,  195;  (2)  profits, 
how  far  they  tend  to  a,  400se5. ;  (3) 
disutility  as  ideal  of  taxation,  437  N ; 
and  expenditure,  503. 

Mint:  par  of  exchange,  346;  mint  price 
and  value  of  gold,  213,  265;  as 
banker,  295. 

Mobility:  of  capital,  313,  458,463;  of 
labour,  166  seq.,  172,  328  seq.,  458. 

Monetary  standard :  comparative  sta- 
bility of  value  important,  254-7; 
parallel  standards,  259. 

Money :  5,  10 ;  of  money  market,  11 ; 
provisional  definition  of,  12 ;  as  meas- 
ure of  values,  63,  212  seq.,  and  of 
growth  of  wealth,  84,  85;  factor  in 
economic  progress,  126-7,  138;  and 
real  incomes,  143;  variations  in 
purchasing  power,  146 ;  as  medium 
of  exchange,  216-7;  definition  and 
functions,  252-8;  characteristics  of 
good  metallic,  258 ;  systems  of  metal- 
lic, 251^)-60;  causes  determining  its 
value,  261-83;  bank-notes  as,  293 
seq.;  use  of,  in  international  trade, 
332,  3.3(J,  338-9 ;  of  banks  and  money 
market  (see  Bank  "  Money");  prog- 
ress of  wealth  and  population  in 
terms  of,  3(59-71 ;  in  relation  to  meas- 
urement in  terms  of  utility  and  dis- 
utility, 372-4;  money  economy  and 
progress  (.see  Commutation) ;  history 
of  metallic,  in  England,  378-80. 

Monopoly:  of  gilds,  52,  186:  of  colo- 
nial trade,  88-9,  511-12,  514  ;  of  land, 
114;  and  foreign  trade,  327;  note 
issue  and,  297;  element  in  ground 


INDEX 


631 


rents,  388-9;  and  agricultural  rents, 
389-91;  in  interest,  39<5,  397;  and 
trusts,  488;  and  combination,  4213-4; 
governmental,  508;  and  incidence  of 
taxation,  454,  458,  475,  476-7,  480, 
494;  value,  5,  218,  232;  principles 
of,  245-51. 

Monotony,  of  work,  53-4. 

Moral:  sciences  include  political 
economy,  6;  rules  not  economic 
laws,  16-7 ;  restraint,  80  seq. ; 
grounds    of    prescription,    118. 

Morley,  John,  498 N. 

Municipal  trading,  425,  445,  499. 

Napoleon,  403. 

National:  production,  35-7;  income, 
140;  money  and  real,  142-4;  divi- 
dend, 173;  debt,  British,  295;  advan- 
tage V.  individual  profits,  362,  489 ; 
independence,  argument  for  protec- 
tion, 491 ;  resources,  protection  of 
peculiar,  490  (cf .  358-9) . 

Natural:  liberty,  415,  418-20;  re- 
sources, limited,  and  foreign  trade, 
358-9,  490. 

Nature  as  agent  of  production,  34, 
35-7. 

Navigation  Acts :  repealed  (1850),  474 ; 
Adam  Smith  on,  491;  their  object, 
493. 

"  Necessaries  "  and  '-'  luxuries,"  taxa- 
tion of,  437-8  (cf .  50.3) . 

Negative :  utility , 23 ;  wages,  146 ;  rent, 
391. 

Net:  advantages  of  different  employ- 
ments, the  tendency  to  equality, 
166  seq.,  what  it  implies,  408;  prod- 
uct, 85  seq. 

Newmarch,  234,  310  N. 

Newton,  Sir  Isaac,  285. 

Nihilism,  124. 

Nineteenth  century :  tendency  to  large 
scale  production,  57 ;  history  of  trade 
unions,  186-7  ;  British  customs  and 
excise  duties,  473-4. 

Noble,  the  gold,  379. 

"  No  man's  land,"  4*59. 

Nominal :  par,  see  Par ;  wages,  see 
Wages. 

Normal  ratios  of  wages,  169,  235,  408; 
prices,  228,  231,  234-40,  245. 

Norman  Conquest,  376,  379,  380. 


Objective  standpoints,  37,  .39-40, 145, 
147-9,  167,  174-5,  437,  440-41. 

Old  Age  pensions,  .503-4. 

Old  tax,  no  tax,  4.33. 

One  pound  notes,  in  Scotland,  294, 
296. 

Open  spaces  in  towns,  469. 

Opinion,  public:  is  it  indefinitely 
pliable  ?  98,  120. 

Organisation  of  industry,  35;  social- 
ism and,  125  seq. 

Output,  the  policy  of  restricting,  190. 

Overissue,  of  convertible  notes,  is  it 
possible  ?  299-302. 

Overpopulation,  Mill's  dread  of,  78, 
91,  116;  danger  of,  under  socialism, 
132. 

Overproduction,  general,  is  it  pos- 
sible? 21(>-7. 

Owen,  Robert,  124. 

Ownership :  see  Property,  private. 

Palgrave,  R.  H.  I.,  2,  303 N,  310 N, 

318,  327n,  412n,520n. 

Pantaleoni,  M.,  12,  31n. 

Parallel  standards,  of  gold  and  silver, 
259,  284,  285. 

Par  of  exchange,  .345. 

Pareto,  V.,  18 n,  31  n,  377n. 

Partnership,  industrial,  124. 

Passy,  M.,  67  n. 

Patronage,  abuse  of  in  colonial  ap- 
pointments, 512-3. 

Patten,  S.  N.,  365n,  496n. 

Pauperism :  is  it  the  outcome  of  the 
system  of  large  capitals  ?  128-9  (see 
also  Poor  Laws) . 

Pauper  labour,  argument  for  protec- 
tion, 492. 

Peasant  properties,  62  seq.,  243. 

Peel,  Sir  R.,  449,  473. 

Penny :  gold,  379 ;  silver,  254,  379 ;  and 
general  prices,  S81-2. 

Pensions,  old  age,  503-4. 

Permanence,  relative  of  capital,  43. 

Persons:  all  taxation  falls  on,  432, 
.501. 

Physiocrats,  32,  35,  91. 

Piece:  wages,  148,  149;  work,  101. 

Piepoudre,  court  of,  421. 

Pierson,  N.  G.,  173n,  19Sn,  207n,  283n, 
303 N,  310 N,  .325 N,  356 N. 

Plehn,C.  C.,45lN,  510 N. 


532 


INDEX 


Political  economy:  literature,  1-3; 
relation  to  other  sciences,  3-6 ;  need 
of  specialisation,  3-5 ;  scope  and  defi- 
nition, 5-8 ;  uses  of  and  rules  for  defi- 
nitions in,  8-13 ;  methods  of,  13- 
15 ;  laws  of,  15-17. 

Pollock :  on  contract,  422 ;  and  Mait- 
land.  History  of  English  Law,  111  n. 

Poor  Laws  (English),  are  they  social- 
istic? 125. 

Poor  relief,  423;  as  a  class  of  public 
expenditure,  499,  500,  510. 

Population:  principle  of,  16,  78-82; 
and  economic  progress,  369  seq.; 
increase  of,  and  rents,  393,  395. 

Porter,  Progress  of  the  Nation,  370, 
386  N,  391 N. 

Post-office,  yield  of  revenue  incidental, 
499,  501. 

Pound,  the  silver,  252,  259,  378  (cf. 
380-1) ;  sterling,  255,  265. 

Power:  to  labour,  duration  of,  39;  to 
save,  86. 

Precious  metals,  most  suitable  as 
metallic  money,  256,  258;  current 
by  weight,  259 ;  former  stability  of 
rates,  288. 

Preferential  duties,  511  seq.,  519. 

Premium:  on  gold,  274  seq.,  350-52; 
does  it  measure  depreciation  of 
paper?  277 n;  under  bimetallism, 
285,  289;   on  notes,  294. 

Prescription :  as  basis  of  private  prop- 
erty, 104-5;  none  in  iustitutious, 
107;   what  constitutes,  118. 

Pretium  affectionis,  116. 

Price,  L.  L.,  198  N. 

Price :  and  value,  212  iseq. ;  of  gold,  213. 

Prices :  general  {see  General  prices)  ; 
course  of,  and  wages,  146-7;  general 
and  relative,  150,  341 ;  interdepen- 
dence of,  in  the  world's  markets, 
281  seq.;  steadied  by  extension  of 
markets,  357;  progiessand  general, 
380-3;  progress  and  relative,  383-6; 
profits  depend  on  differences  in, 
3(KM01  (cf.  282)  ;  of  different  kinds 
of  labour,  progress  and,  405-10; 
effects  of  a  tax  on,  456-9. 

Primogeniture,  109,  110. 

Produce,  kind  of,  and  system  of  culti- 
vation, 66. 

Produce  rents,  257,  388-9. 


Produce  theory  of  wages,  160  seq. 

Producers'  deficits,  373. 

Production :  laws  of,  6 ;  agents  of,  11, 
12,  34-5;  labour  as  prerequisite  of 
wealth  emphasised  in,  22;  meaning 
of,  32-4 ;  physical  facts  important  in, 
35-7;  act  of,  when  completed,  33-70; 
and  consumption,  material  and  im- 
material, 50,  52,  57;  on  large  and 
small  scale,  (a)  in  manufactures,  50, 
56-61,  74-6,  130;  (b)  in  agriculture, 
62-7;  socialistic  organisation  of, 
126,  131 ;  relation  to  exchange,  211 ; 
cost  of,  and  value,  231  seq. ;  expenses 
of,  233  seq.,  240;  disutility  of,  372^ ; 
benefits  and  drawbacks  of  freedom 
of,  418. 

Production-capital,  35,  42,  43,  44,  84, 
138. 

Productive  and  unproductive,  32,  35, 
91. 

Productive  power :  in  international 
trade,  331  seq.;  progress  in,  374, 
375;  profits  and,  401. 

Productiveness  of  taxation,  448,  449, 
451. 

Profit:  interest,  175 seg., 313;  rent, 40, 
314. 

Profit-sharing,  60,  101 ;  not  socialism, 
124,  197. 

Profits:  influence  of  rate  on  size  of 
farms,  65  ;  and  growth  of  capital,  83; 
theory  of  surplus  profit,  127-8,  129; 
blended  with  rent,  139-40;  largest 
part  is  wages,  140;  part  quasi-rent, 
140;  differences  in,  142;  analysis, 
11,  174-82;  the  tendency  to  equal- 
ity, 182-3,  238;  the  general  rate, 
183-4,  398 ;  effects  of  combinations, 
191-5;  in  relation  to  money  cost, 
233,  237  seq.;  progress  and,  395- 
403 ;  how  far  tendency  to  a  mini- 
mum, 395,  400-3;  tendency  to  equal- 
ity and  incidence  of  taxes,  458,  4(33 
seq.,  474  seq.;  v.  national  advan- 
tages, 362,  489. 

Progress:  of  society,  from  status  to 
contract,  96,  127,  374 ;  dependent  on 
division  of  labour,  50;  and  immi- 
gration to  towns,  54-5,  62 ;  and  law 
of  diminishing  return,  71-3,  75; 
from  inheritance  to  bequest,  107-8; 
from    blood    relationship    to    iudi- 


INDEX 


533 


vidual  freedom,  107-8;  money,  the 
chief  factor  in,  127,  374,  378;  the 
socialist  view  of,  128;  lessens 
fluctuations  in  prices,  146 ;  economic, 
in  relation  to  general  —  need  of 
separate  analysis,  367-1);  its  nature 
and  measurement,  369-77;  its  prin- 
ciples not  to  be  deduced  from 
general  theory  of  evolution,  368-9; 
of  population,  369-70;  money  value 
of  the  people  as  test  of,  370-71 ;  in 
terms  of  utility  and  disutility, 
372-4;  in  production,  exchange,  and 
distribution,  374-7;  and  money,  374, 
378-80;  and  general  prices,  380-83; 
and  relative  prices,  383-6,  and  rent, 
387-94;  and  profits,  395-403;  and 
wages,  405-12  (see  also  Commuta- 
tion) . 

Progressive  taxation :  and  equality  of 
sacrifice,  438-9;  and  faculty  theory, 
442,446. 

Property,  meaning  and  economic 
foundations  of,  95-6. 

Proper tj^  private :  economic  definition, 
90-100;  economic  bases  of,  18,  96, 
100-5,  112-3;  is  freedom  of  bequest 
essential  to  the  idea  ?  107,  109; 
inheritance  not  part  of  the  idea,  107. 

Protection:  crude  fallacies  of,  9-10; 
and  production  on  large  scale,  50; 
mediseval,  51 ;  modern,  52 ;  as  result- 
ing from  policy  of  restricting  out- 
put, 190;  and  monopoly,  246,  327; 
possible  effect  of  sudden  abandon- 
ment, 360;  to  young  industries,  360; 
prices  and  rents,  391 ;  of  peculiar 
national  advantages,  485;  v.  free 
trade,  484-96. 

Psychology,  6. 

Public:  opinion,  is  it  indefinitely 
pliable  ?  98,  120 ;  its  despotic  power, 
428;  spirit,  socialists  emphasise, 
131,  135. 

Purchasing  power,  general,  146,  256. 

Purveyance  and  preemption,  472. 

Qualifying  adjectives,  use  of,  11. 
Quantitative  distribution,  96,  1.36  seq. 
"  Quantity    of    labour,"    38-9,    45-6, 

145-fi,  148,  185,   186;   trade  unions 

and,  187. 
Quantity  theory,  of  money  and  prices, 


261-83;  abstract  statement  —  in- 
fluence of  quantity,  261-2,  301; 
illustrated  by  incontrovertible  notes, 
273-6;  effects  of,  rapidity  of  circu- 
lation, 263;  volume  of  trade,  264; 
barter,  264;  non-monetary  demand 
for  gold  — for  arts,  etc.,  264-5,  287; 
hoarding,  264;  cost  of  production, 
265-8;  credit,  278-81;  Rogers  mis- 
interprets, 380-2. 

Quasi-vent,  use  of  term  misleading, 
172;  in  wages,  170;  and  wages  of 
management,  193-4 ;  connection  with 
price,  239,  243-5,  391,  398,  402,  444, 

Quesney,  32. 

Quid  pro  quo :  basis  (1)  of  taxation, 
444-5;  (2)  of  expenditure,  499-500. 

Race  qualities,  influence  on  efficiency, 
39. 

Rae,  John,  135 N. 

Railways,  57. 

Rapidity  of  circulation  of  money,  263. 

Rates :  see  Local  taxation. 

Ratio  between  gold  and  silver :  causes 
affecting,  267-8,  284-5;  fixed  under 
bimetallism,  260,  284  scq.;  relative 
stability  (1500-1873) ,  288. 

Real :  cost  of  labour,  185 ;  wages,  97, 
140, 141, 185 ;  national  income,  142-4, 
160;  cost  of  production,  232-3;  ad- 
vantages of  foreign  trade,  356  seq.; 
cost  of  production  and  cheapness, 
372-3. 

Reciprocal  demand,  161,  337. 

Reciprocity  treaties,  492,  493. 

Recoinage  of  1696,  255,  269,  380. 

Reformation,  the,  383. 

Regressive  taxation,  444. 

Relative:  see  Prices,  Wages. 

Rent:  consumers',  26-29;  economic, 
10 ;  development  of  theory,  35 ;  gross 
produce  and,  63;  judicial  rents,  96; 
produce  rents,  140;  labour  rents,  i6.; 
and  progress,  the  socialist  view,  128; 
profit-rent  140;  ^uasi-rent,  140,  207, 
243-5;  differences  in,  142;  money 
and  produce,  143 ;  and  differences  in 
wages,  172;  different  meanings  of 
the  term,  199  seq.;  economic  rent, 
the  theory  of,  200-7  ;  cases  in  which 
rent  may  affect  price,  239,  241-3, 
251  n;  buyers'  monopoly  —  custom- 


634 


INDEX 


ary  rents,  231;  progress  and,  387- 
94 ;  as  a  measure  of  progress,  387-8; 
urban  ground  rents,  388-9;  agricul- 
tural rents,  389-91;  effects  of  im- 
provements on,  391-3  (cf.  395) ; 
effects  of  the  season  on,  393-4 ;  in- 
cidence of  taxes  on  (1)  agricultural 
rent,  461-3;  (2)  ground  rents,  463-9. 

Representation  and  taxation,  435-6. 

Representative :  (1)  commodities  (see 
Index  numbers) ;  (2)  money,  266, 
292,  293,  304  seq.,  317. 

Reserve :  see  Bank  reserves. 

Restriction  of  output,  190. 

Retaliation,  492,  494. 

Revenue  capital,  41,  43,  138. 

Revenue  duties,  and  free  trade,  484. 

Ricardo :  the  "iron  law"  of  wages, 
127  seq.;  economic  rent,  199-200; 
effects  of  improvement  on  rent,  .392, 
393;  cost  of  production  and  value, 
234 ;  foreign  trade,  341 ;  value  and 
riches,  372. 

Riches  and  value,  372. 

Risk :  indemnity  for,  175, 178-80, 181-2 ; 
in  lending,  396;  and  profits,  402-3 
(see  also  Insurance). 

Rogers,  Thorold,  14,  66,  151,  213,  234, 
380 ;  fall  in  weight  of  silver  penny  — 
misapplication  of  quantity  theory, 
381-2;  relative  prices,  384,  386  n; 
rents  in  England,  390,  412 n. 

Roman  distribution,  376 ;  methods  of 
colonisation,  517. 

Ruskin,  John,  53. 

Russia:  property  in  land,  112;  rouble 
notes  at  a  premium,  294 ;  excise  and 
customs,  482. 

Sacrifice,   equality  of,  as  basis  of 

taxation,  4-37-40  (cf.  502). 
Saint  Simon,  121. 
Sauerbeck,  index  numbers,  216. 
Saving,  43,  45,  84;  what  it  implies, 

83  seq. ;  may  be  made  from  wages, 

85 ;  power  and  will  to,  86-9. 
Savings,  taxation  of,  439-40. 
Scarcity,    value,    wages    and,   171-2; 

sent,  "204,  243. 
Schiiffle,  A.,  1.35 N. 
Schloss,  D.  F.,  148,  165 n. 
Scotland:  crofters'  labour,  62;  small 

farms,  66;  judicial  rents  iu,  96;  dis- 


tribution of  land, 137 ;  cottars'  wages, 
170 ;  one-pound  notes  in,  294-5,  296 ; 
rate  of  interest  in,  398. 

Scott,  Sir  W.,  as  Sir  Malachi  Mala- 
growther,  298. 

Scottish  banking :  see  Banking. 

Seasons,  as  affecting  rents,  391,  393-4. 

Security :  as  affecting  will  to  save,  87, 
89;  an  economic  basis  of  prescrip- 
tion, 104-5;  for  investment  of  ten- 
ants' capital  in  land,  114;  and 
compensation  for  expropriation,  116- 
7,  118;  attained  under  village  com- 
munities and  feudalism,  120;  and 
foreign  trade,  358;  and  interest, 
396,  397. 

Seebohm,  F.,  144n,  155,  377n,  382, 
389,  394N,  429,  469. 

Seigniorage  under  bimetallism,  284. 

Self-interest,  socialism  and,  131 ;  a 
variable  conception,  420. 

Seligman,  E.  R.  A.,  135n,  430,  439, 
440,  445,  451 N,  459 N. 

Sellers'  monopoly,  171  (see  also  Mo- 
nopoly). 

Serfdom:  efficiency  of  labour  under, 
40 ;  mediaeval,  55,  138 ;  its  most  dis- 
tinctive mark,  429. 

Services,  exchange  of,  96  (see  also 
Commutation). 

Settlement  law,  168,  411. 

Seventeenth  century,  rents  in  Eng- 
land, .391. 

"Shifting"  of  Taxes:  see  Taxation, 
Incidence. 

Shilling,  the,  its  origin,  252,  254. 

Sidgwick,  H.,  18 N,  100,  105 n,  IIIn, 
119  N,  139,  144  N,  165  N,  173  N,  184  N, 
198n,  220,  364,  416,  417,  428n,  496 N. 

Silver:  coinage  in  medieeval  England, 
254,  259,  260 ;  free  coinage  suspended 
in  Latin  union  and  India,  260,  271, 
284 ;  now  token  money  in  England, 
260,  271-2;  sixteenth-century  dis- 
coveries, 262,  264;  under  bimetal- 
lism, 284-285;  present  position  of, 
291 ;  English  pound  and  penny, 
377-9,  fall  in  weight  of  penny,  378, 
.381. 

Single  tax,  35  (cf.  Land  Values,  Ta.x- 
ation  of). 

Situation:  of  country,  36;  economic 
rent  from,  202. 


INDEX 


535 


Sixteenth  century,  262,  264. 

Skill:  division  of  labour  and,  48; 
capital  as,  130. 

Slavery,  33,  46;  unfavourable  to 
growth  of  population,  81 ;  and  the 
will  to  save,  87;  and  inefficiency, 
101 ;  expropriation  of  slaves,  115 ; 
transition  to  free  labour,  139;  under 
free  government,  428  N. 

Sliding  scale,  157,  196. 

Smart,  W.,  144  n,  219  n. 

Smith,  Adam,  3-4,  7 ;  quantity  of 
labour,  38;  intensity  of  labour,  38; 
preparation  for  labour,  38 ;  wide 
meaning  of  "labour,"  40;  capital, 
41;  fixed  and  circulating  capital, 
44,  45  n;  division  of  labour,  47,  48, 
51 ;  monotony  of  labour,  53 ;  com- 
merce of  towns  and  improvement 
of  country,  64;  joint-stock  com- 
panies, 59;  improvements  in  com- 
munications, 71 ;  high  profits  and 
monopoly  of  colonial  trade,  88-9; 
capital  best  secured  in  the  land,  90; 
weakness  of  the  State,  99;  bequest, 
109;  admits  exceptions  to  natural 
liberty,  125  (cf.  360) ;  wages 
partly  profits,  140;  wages,  real,  145 ; 
differences  in  wages,  166,  167,  170, 
173  n;  profits,  174;  ambiguity  of 
"value,"  211;  real  and  nominal 
price,  214 ;  natural  and  market 
price,  231;  Bank  of  Amsterdam, 
293^;  immobility  of  labour,  331; 
relation  of  exchanges  to  balance  of 
trade,  340;  admits  possible  excei> 
tions  to  free  trade,  360  (cf.  125) ; 
employments  of  capital,  362,  489; 
population  and  prosperity,  369;  his 
influence  on  distribution,  376-7; 
progress  and  relative  prices,  383-4 ; 
profits  and  interest,  396;  circulating 
and  fixed  capital,  399,  400  n  ;  profits 
and  prices,  401 ;  laws  of  settlement, 
411 ;  natural  liberty,  415 ;  provision 
of  public  works,  425;  canons  of 
taxation,  434-49;  equality  of  taxa- 
tion, 434,  435 ;  progressive  taxation, 
442;  taxation  of  rent  and  ground 
rent,  443-4;  "protection"  basis  of 
taxation,  444;  formal  justice,  447; 
canons  of  certainty,  convenience, 
and  economy,  447-9;  concentration 


of  taxation,  449;  inequality  prefer- 
able to  uncertainty,  451,  510;  taxa- 
tion of  profit-rent,  466 ;  his  canons 
transgressed  before  1815,  473 ;  free 
trade,  486, 487,  491,  492;  his  negative 
argument  for  free  trade,  494-5, 496  N ; 
public  expenditure,  510  n;  what 
peopled  America,  511 ;  monopoly  of 
colonial  trade,  512;  imperial  feder- 
ation, 518. 

Smith,  Armitage,  498  n. 

Smith,  John,  Memoirs  of  Wool,  388. 

Smith,  J.  W.,  Mercantile  Law,  422. 

Smith,  R.  Mayo,  412  n. 

Social:  science,  political  economy  a, 
6-7;  evils  of  division  of  labour,  55; 
dividend,  theory  of  taxation,  444-5. 

Socialism :  relation  of  political  econ- 
omy to,  8;  Mill  on,  96-8;  opposed 
to  freedom  of  contract,  104 ;  v.  indi- 
vidualism, 120-35 ;  in  relation  to 
exchange,  375 ;  and  taxation,  44t)- 
7  (cf .  503-5) ;  of  unearned  incre- 
ments, 468. 

South  Sea  Bubble,  59,  309. 

Sovereign,  the  gold,  252,  254;  defini- 
tion of,  255,  265;  first  coined  (1489), 
379. 

Sovereignty,  the  conception  of:  its 
application  to  the  distribution  of 
wealth,  98-9,  111,  120  (cf.  132) ;  and 
right  of  expropriation,  115 ;  as  basis 
of  taxation,  429,  435-7;  and  of 
public  expenditure,  498,  502. 

Specialisation :   of   skill,   48  seq 
localities,  51. 

Speculation,  129  ;  in  mediaeval 
modern  markets,  218,  403; 
crises,  309-10. 

Spencer,  H.,  128. 

Standard  for  deferred  payments,  254 
seq.,  294. 

Staple,  the,  423. 

State :  ownership  and  management  of 
land,  114;  its  weakness  as  regards 
distribution,  122-3;  its  industrial 
functions,  134-5  (.see  also  Govern- 
ment). 

Statical:  form  of  laws  of  increasing 
and  diminishing  returns,  68-71,  72, 
74-5 ;  conditions  required  for  ideal 
distribution,  408. 

Statistics,  18,  26,  234. 


of 


and 
and 


536 


INDEX 


Status,  movement  from,  to  contract : 
see  Contract. 

Steuart,  Sir  James,  304. 

Subjective  and  objective  standpoints: 
i7i  re  labor,  37^0 ;  in  re  wages,  145- 
6,  147-8,  166-7;  in  re  profits,  174-5; 
bases  of  taxation,  437  seq.,  440-1. 

Subsidiary  industries,  58. 

Subsistence,  means  of,  population 
and,  79  seq. 

Substitutes,  as  affecting  demand,  189, 
190,  223,  249. 

Substitution,  law  of,  55,  90,  160,  238, 
384-7,  412,  476,  501,  509-10. 

Succession :  laws  and  customs  af- 
fecting, 1.38;  duties,  446,  453. 

Superintendence,  wages  of,  see  Man- 
agement, wages  of. 

Supplementary  cost,  38. 

Supply:  law  of,  224;  elasticity  of, 
225;  effects  of  changes  in,  on  price, 
225,  227,  228;  and  demand,  equation 
of,  225;  excess  of,  216-7  {see  also 
Demand  and  supply). 

Surplus:  debatable  between  labour 
and  capital,  192 ;  profit,  127  seq. 

Survival,  of  the  fittest,  through 
competition,  418. 

Sympathetic  movements  in  prices, 
281-3. 

Tabular  standard,  256-7. 

Task  wages,  148,  149. 

Tate's  Cambist,  343. 

Taussig,  F.  W.,  165 n,  492,  496. 

Taxation:  arbitrary  and  oppressive, 
87,  115,  118-9;  principal  character- 
istics (a)  compulsion,  429-30,  432, 
435;  (6)  evasion,  430-1;  (c)  objects 
—  progress  from  special  to  general, 
431;  (d)  payments  partially  taxes  — 
prices,  fees,  431  (cf.  445)  ;  (e)  public 
loans,  4.32;  really  imposed  on  per- 
sons, 432 ;  definition,  432 ;  an  old  tax, 
no  tax,  433;  Adam  Smith's  Canons, 
434-49;  I,  equality,  4.34-47 ;  {})  sover- 
eigntij  basis,  43.5-0:  and  representa- 
tion, ib.  (cf.  498,  511) ;  abilities  and 
revenue,  436-7 ;  subjective  and  objec- 
tive standards,  437, 440-1 ;  (2)  equal- 
ity of  sacrifice,  437-40,  451,  502;  (a) 
free  minimum  income,  437-8;  {b) 
progressive  taxation,  438-9;  (c)  tax 


varying  with  source  of  income, 
439-40;  (3)  faculty  theory,  437,  440- 
2;  (a)  rule  of  simple  proportion, 
441 ;  (b)  minimum  free  income,  ib.; 
exemption  of  minimum  rate  of 
profits,  441-2 ;  (c)  progressive  taxa- 
tion, 442;  (d)  tax  varying  with 
source  of  income  —  unearned  incre- 
ments, 442-4;  (4)  benefit  theory, 
444-5  (cf.  431) ;  (5)  social  function 
theory,  445-7  (cf.  504) ;  (6)  principle 
of  formal  justice,  447  (cf .  505) ;  II, 
certainty,  448;  III,  convenience, 
448-9;  IV,  economy,  449;  other 
rules,  449-51;  Incidence,  451; 
general  principles  of,  452-9;  as 
determined  by  (o)  law  and  custom, 
454;  {b)  contract  and  exchange, 
455-9 ;  of  taxes  on  rent  —  pure 
economic,  on  agricultural  land, 
461-3;  on  building  land,  house-rent, 
"land  values,"  463-9;  of  taxes  on 
consumable  commodities,  471-81 ; 
methods,  471-3 ;  British  customs  and 
excise  in  the  nineteenth  century, 
473-4;  incidence  of  (a)  internal 
taxes,  474-6;  {b)  import  duties, 
476-8;  (c)  export  duties,  478-80; 
application  of  the  general  canons, 
480-1 ;  comparison  of  direct  and 
indirect  taxes,  481-3 ;  revenue  duties 
consistent  with  free  trade,  484 ;  com- 
parison of  public  expenditure  with, 
497  seq.;  preferable  to  speculation 
for  profit,  509. 

Technical :  terms,  not  to  he  multiplied, 
13 ;  training  may  be  overrated,  39. 

Telescopic  faculty,  87. 

"  Things  in  general,"  213  seq. 

Thirteenth  century,  378. 

Time :  an  element  in  quantity  of 
labour,  38;  division  of  labour  and 
economy  of,  48-9;  in  relation  to 
law  of  diminishing  return,  71; 
wages,  148,  149;  and  exchange, 
276. 

Token  money:  leather  in  mediaeval 
England,  259;  silver  and  bronze  in 
England,  260;  definition  and  princi- 
ples of  issue,  271-2. 

Tolls,  470. 

Tooke,  IIi.itory  of  Prices,  14,  234, 
310n,386n,  391N. 


INDEX 


537 


Total  utility,  23,  24  seq.,  223,  372,  503 
{see  also  Utility). 

Towns,  immigration  to,  54-5,  62. 

Trade:  and  the  flag,  516-8  {see  also 
Free,  Foreign,  International). 

Trade  unions,  5,  IS;  their  origin,  186; 
nature  and  aims,  187-8;  influence 
on  wages,  188-<)5,  412. 

Transfer  of  values,  money  and,  2.57-8. 

Transport:  a  species  of  production, 
3."5;  tendency  to  concentration,  57; 
as  affecting  saving,  86 ;  nineteenth- 
century  improvements,  12i);  effect 
of  improvements  on  rent,  391,  392, 
393. 

Tribute,  a,  its  effect  on  foreign  trade 
and  distribution  of  gold,  353. 

Trusts,  5,  50,  56,  57,  111,  170,  245,  246, 
?rA,  418,  419,  488. 

Tudor  debasement  of  currency,  378. 

Uncertainty  :  see  Contract,  Taxa- 
tion. 

Unearned  increment :  see  Increments. 

United  Kingdom :  joint-stock  compa- 
nies, 58-61 ;  coiiperation  in  farm- 
ing, 64;  capital  sunk  in  land,  90; 
national  income,  141;  wages  in 
nineteenth  century,  152 ;  standard 
of  value,  254;  banking  transac- 
tions, 278 ;  gold  reserve,  279 ;  opposi- 
tion to  bimetallism,  288-90;  money 
market  "money,"  305;  progress 
and  foreign  trade,  358;  relative 
wages  of  women  and  men,  408-9; 
employment  of  children,  409-10;  free 
minimum  income  principle  in  taxa- 
tion, 438;  concentration  in  taxa- 
tion, 449;  budget  calculations,  4,'')0; 
customs  and  excise  in  nineteenth 
century,  473-4;  free  trade  and  mili- 
tary strength,  489;  and  industrial 
development,  495;  foreign  trade  a 
minor  part  of  whole,  495 ;  the  bur- 
den of  empire,  515. 

United  States:  cultivating  owniership, 
65;  freedom  of  contract,  103;  con- 
stitution limits,  right  of  expropria- 
tion, 115;  wages,  1.52-3;  treasury 
reports,  291;  banking  system,  302; 
customs  and  excise,  482;  protection 
of  young  industries,  492  (cf.  488) ; 
internal    free   trade,  495 ;    emigra- 


tion to,  517;  a  "might  have  been," 
518. 

Unproductive:  see  Productive. 

Urban  ground  rents :  see  Ground 
Rents. 

Usury, history  of,  396. 

Utilitarianism,  416-8 ;  its  ideal  of  pub- 
lic expenditure,  .503. 

Utility:  a  mark  of  wealth,  6,  21-2, 
and  disutility,  22-3;  relativity  of, 
23;  consumption  in  terms  of,  23-4; 
total  and  marginal,  24-6,  45-6; 
law  of  diminishing,  25;  cannot  be 
measured  in  money,  26-9;  present 
and  future,  83  srq. ;  economic  utili- 
ties, 139;  consumption  and  disre- 
gard of  real,  141;  of  labour,  146, 
149;  relation  to  value,  211-2  ;  in  re- 
lation to  demand  and  supply,  219, 
223-4;  of  money  material,  253,  264; 
economic  progress  in  terms  of, 
372-4 ;  maximum,  as  economic  ideal, 
416-8;  and  taxation,  432;  maximum, 
as  ideal,  of  public  expenditure,  503. 

Value:  as  prerequisite  of  wealth, 
21-2 ;  money  value  as  measuring 
growth  of  wealth,  83,  84-5 ;  scarcity 
value,  171-2;  of  labour,  in  relation 
to  produce,  173;  ambiguity  of  the 
term,  211;  how  related  to  utility, 
211-2,  372-4;  a  relative  term,  212 
seq.,  233;  and  price  212  seq.;  and 
price  of  gold,  213;  as  general  pur- 
chasing power,  213;  no  absolute 
standard,  214;  prerequisites  of, 
219;  market  and  normal,  231  seq.; 
cost  as  determining,  234  seq.;  mo- 
nopoly, 245-51;  relative  stability 
essential  to  standard,  254-7;  of 
gold,  causes  determining,  261-83;  of 
money,  economic  and  mercantile 
senses,  324-5. 

Values:  relative  prices  adjusted  to, 
215  (cf.  Adjustment) ;  a  general 
rise  or  fall  impossible,  215-6,  237; 
monopoly,  232,  245  .^cq.;  changes  in 
general  wages,  or  profits  may  affect 
relative,  237 ;  relative,  of  gold  and 
silver,  267. 

Variations  in  value  of  money,  146 
{see  also  Quantity  Theory). 

Verbal  explanations,  9. 


538 


INDEX 


Yerney,  Lady,  67  n. 

Vested  interests,  protection  and,  360, 

487-8,  492. 
Village   communities,   18,  35,  47,  96, 

112,  120,  131. 
Voluntary  associations,  their  power, 

419. 

Wages:  economic  use  of  term,  11; 
economy  of  high,  39,  102,  196,  508; 
relative  and  small  farming,  67; 
saving  from,  85 ;  real  and  nominal, 
87,  140,  141,  145-7,  214,  401,  403, 
405;  the  "  iron  law,"  127-9;  money 
and  real,  during  nineteenth  century, 
130;  partly  quasi-rent,  140;  as  de- 
termined by  law  and  custom,  140; 
subjective  and  objective  stand- 
points ;  (a)  as  real  reward  of  a 
quantity  of  labour,  145;  (b)  as  pay- 
ment for  work  done,  147-9;  the 
general  rate  —  what  the  conception 
implies,  149-53  ;  causes  determining 
the  general  rate,  153  seq.;  wages 
fund  theory,  154-60;  produce 
theory,  160-4 ;  general  relations  to 
profits  and  rents,  164-5 ;  causes  of 
difference  of  wages ;  (a)  in  different 
employments,  166-71 ;  (/*)  of  indi- 
viduals, 171-2  ;  effects  of  machinery 
on,  172-3;  regulation  of,  186;  in- 
fluence of  trade  unions,  188-95; 
rent,  quasi-Tent  and,  193;  mini- 
mum, 195;  and  prices,  196;  an 
element  in  money,  cost  of  produc- 
tion, 233,  235  seq.;  can  combina- 
tions raise  them  at  expense  of 
consumer  ?   188-91 ;  or  of  profits  ? 


191-5 ;  effects  of  progress  on  rela- 
tive, 405-10. 

Wages  Fund  theory,  9,  45,  154-60. 

Wages  of  management :  see  Manage- 
ment. 

Wagner,  377  N. 

Walker,  F.  A.,  142,  163,  165n,  184n, 
207 N,  253,  260n,  277,  291  n,  303n, 
394  N. 

Walsh,  CM.,  219  N. 

Wants,  new,  and  new  luxuries,  coun- 
teract tendency  to  concentration 
of  labour  and  capital,  58. 

Wealth :  economic  conception  of,  6, 8 ; 
popular  conception  of,  21 ;  economic 
analysis,  21-2 ;  jiroduction  of  ma- 
terial, 33;  and  of  personal,  33-4; 
limits  to  increase  of,  68  seq.,  91-2; 
national,  money  measurement  of, 
369 ;  and  taxation,  432. 

Wealth  of  Nations :  see  Adam  Smith. 

Webb,  Sidney  and  Beatrice,  61  n,  135  n, 
165  N,  188,  198  N,  412  N. 

Wer,  in  Saxon  law,  370. 

Wicksteed,  P.  H.,  3lN. 

Wieser,  F.  von,  29 n. 

Will  to  save,  86,  87  seq. 

Women's  wages,  408-9. 

Work,  wages  as  the  payment  of, 
147-9. 

Workmen's  budgets,  147,150,  214,405. 

Yeomanry,  displacement  of,  137. 
Young,  Arthur,  63. 

Young  industries,  temporary  protec- 
tion of ,  491-2  (cf.  360-1). 

Zoll-Verein,  the  German,  495. 


Principles  of  Political  Economy 

By  J.  SHIELD   NICHOLSON,  M.A.,  D.Sc. 

Professor  of  Political  Economy  in  the  University  of  Edinburgh,  etc.,  etc. 


Vol.  I,  8vo.  Cloth.  $3.00 
Vol.  II.  8vo.  Cloth.  $2.25 
Vol.  III.     8vo.     Cloth.     $3.00  net 


"  As  a  review  of  political  economy,  as  its  truths  appear  to  the  most 
advanced  conservative  students  of  the  present,  this  work  will  prove  of 
very  great  value  to  all  who  would  put  themselves  in  possession  of  the 
fundamental  portions  of  political  economy." — Journal  of  Education. 

"This  book  is  valuable  not  only  for  the  manner  in  which  it  explains 
the  principles  of  political  economy,  but  also  for  the  historical  informa- 
tion it  contains."  —  Monist. 

"  The  author  is  a  very  careful  writer,  and  seems  rather  inclined  to 
give  all  that  has  been  thought  on  a  subject,  than  to  draw  hasty,  ill- 
digested  conclusions.  Those  who  wish  to  gain  a  knowledge  of  the 
historical  aspect  of  the  subject,  especially,  will  find  this  book  of  great 
assistance  to  them."  —  Stale  Journal. 

"The  author  has  been  for  the  past  twelve  years  professor  of  political 
economy  in  the  University  of  Edinburgh,  and  the  work  has  grown  out 
of  the  lectures  delivered  before  his  classes  during  that  time.  ...  It 
is  the  work  of  a  profound  scholar  and  thinker,  and  of  an  acknowledged 
authority  in  economic  science."  —  Boston  Transcript. 

"He  is  not,  however,  one  of  the  historical  school,  so  called,  but  a 
liberal  adherent  of  the  standard  school  of  classical  economics,  with 
great  independence  in  criticism  and  supplementing  Mill  in  particular. 
Those  who  quote  Mill  in  support  of  socialism  would  be  especially 
profited  by  a  careful  study  of  Professor  Nicholson's  first  volume." 

—  Literary  World. 

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